A question regarding dividend reinvestment and tax/cost basis

jerryxe's Avatar

jerryxe

10 Sep, 2021 03:50 AM

This has been an issue for me for so long, so I decided to write down to share, and get your thoughts.

  • Let's say, there is a stock ABC that is priced at $1 per share, and the price never change, but it does issue annual dividend of 10% at the end of year.
  • On Dec 31st 2018, I bought 10,000 shares of ABC for a total of $10,000.
  • On Dec 31st 2019, ABC issued 10% dividend (=$1,000), which is then automatically converted to 1,000 shares of ABC, through dividend reinvestment plan. For tax year 2019, I paid tax on the qualified dividend of $1,000.
  • I did accounting like screenshot 1 (Add a DivReinvest with 1000 shares and $1000 amount), I will end up having 11,000 shares, with a cost basis of $11,000 and current value of $11,000. (See screenshot 2). Capital Gain report will also show I have $0 unrealized gain and $0 long term gain.

So to summarize:

  • From the tax prospective, MD looks right, it shows my earning is $0, but does not show my realized gain of $1,000 from the dividend. So it never tells me how much I earned from my investment. Capital Gain report will also show $0 realized or unrealized gain.
  • From investment prospective, it does not look right, since after one year investment, I actually have earned $1,000 , not $0.
  • So either way, MD seems not telling me the full story of how much I have earned? Any suggestion on making it right? (Tell me there is a gain of $1,000, either realized or unrealized).

I find a solution which has a different problem:

  • I was trying to do a modified accounting like screenshot 3 (In DivReinvest, I set amount to $0, which will default the price to $100). Then in the summary page, it will show me that I have a gain of $1,000 (screenshot 4). And in Capital Gain report, it will show me an unrealized gain of $1,000 (screenshot 5).
  • This accounting method seems perfect to me, however, there is a big problem:
  • When you sell all ABC stocks later, in the "Match Lot" window (Screenshot 6), I will never be able to submit the allocation, and the window will keep showing up. I think this is caused by the price $100 in the history (as I mentioned above, which is the default price when setting amount to $0).
  • If I change the cost basis method from "Lot Matching" to "Avg Cost", the Capital Gain report will show incorrect cost basis, and shows I have a huge loss (screenshot 7).
  1. 1 Posted by dwg on 10 Sep, 2021 04:14 AM

    dwg's Avatar

    I'm a fellow user.

    Under the scenario you have provided you have an income event of 1000 because of the dividend. There is no capital event at all. You would have a capital gain event if you had sold the shares for more than they are worth or an unrealised capital gain if the shares were now worth more now that what they cost, in the example you give the current value is the same as the cost basis.

  2. 2 Posted by jerryxe on 10 Sep, 2021 04:44 AM

    jerryxe's Avatar

    Thanks, dwg!

    But I think dividend income is still investment return (e.g. Net Investment Income Tax includes dividends), so maybe I should say:

    I want to get an view to show my total investment return (realized + unrealized).

  3. 3 Posted by jerryxe on 10 Sep, 2021 04:49 AM

    jerryxe's Avatar

    FYI, I found that in DivReinvest, I got to choose Category, and the dividend is recorded under the Category I choose (E.g. in screenshot 1, it's "1-Food"), but this does not associate with each investment/stock, so there is no way to tell how much dividend income does each stock earn.

    The reason I care about it so much, is that I have a few different income/muni/bond funds that issues a lot of dividends, which is then automatically reinvested, so I don't pocket cash into my account. However I do want to know over the time what's total return rate (Looking at the price different is useless, since most of the values it generates are distributed through dividends, so the price does not change much).

  4. 4 Posted by Stuart Beesley ... on 10 Sep, 2021 05:30 AM

    Stuart Beesley - JUST A FELLOW USER and Toolbox ‘guy’'s Avatar

    What version of MD are you on?

    I just copied your tests and get different results.

    But I can say that the Investment Performance report DOES report the $1000 dividend income, and also that recording the dividend against categories DOES also work. It also associates it with the stock...

    The capital gains report for unrealised gains does not work properly. I worked with the developer a while ago and we got the portfolio screen and other reports working. Interestingly I get different results to you.

    I can also say that buy/sell zero and values of zero screw up things in MD - especially the LOT matching window....

    ?

    (not support, just a fellow user)

  5. 5 Posted by Stuart Beesley ... on 10 Sep, 2021 05:32 AM

    Stuart Beesley - JUST A FELLOW USER and Toolbox ‘guy’'s Avatar

    PS - I've simply given up with relying on MD for the tax gains report... There are too many issues and problems and I parallel track my stocks, buys, sells, gains, with UK tax rules, in a SS too... Yup - and every year I reconcile the data.... 

  6. 6 Posted by dwg on 10 Sep, 2021 05:37 AM

    dwg's Avatar

    Categories record income and expense amounts. It is unusual, although possible, to create categories to measure down to the individual investment. Categories reports are normally used at the level of categories and subcategories.

    For Investment performance it would be normal to look at the Investment Performance and Portfolio reports.

  7. 7 Posted by jerryxe on 10 Sep, 2021 05:44 AM

    jerryxe's Avatar

    Hi Stuart, I am on 2021.1 (3069), should be the latest non-beta version?

  8. 8 Posted by Stuart Beesley ... on 10 Sep, 2021 05:47 AM

    Stuart Beesley - JUST A FELLOW USER and Toolbox ‘guy’'s Avatar

    PPPS. For real capital gain events, I create a fake MD txn (Xfr) from a fake junk tax category (that I always ignore) to a category called capital-gains. I can then use income expense reports to see CGs and never worry about losing them.

  9. 9 Posted by jerryxe on 10 Sep, 2021 05:59 AM

    jerryxe's Avatar

    I hope someone can fix the lot matching windows issue, so that I can happily use the DivReinvest with $0 amount to get dividend classified as capital gain in reports.

  10. 10 Posted by Stuart Beesley ... on 10 Sep, 2021 07:46 AM

    Stuart Beesley - JUST A FELLOW USER and Toolbox ‘guy’'s Avatar

    Quick question. Do you need to log match, or could you use avg cost basis?

  11. 11 Posted by jerryxe on 10 Sep, 2021 07:51 AM

    jerryxe's Avatar

    I used lot matching to keep track tax basis, since in my brokerage, I choose highest cost first method to allocate tax lots.

    Also I noticed that when using avg cost, the capital gain report may generate wring numbers. I didn’t check the exact reason, but I will try out tomorrow to see what caused it.

  12. 12 Posted by Stuart Beesley ... on 10 Sep, 2021 08:13 AM

    Stuart Beesley - JUST A FELLOW USER and Toolbox ‘guy’'s Avatar

    Could you create a NEW dataset with just ABC and the buy and DivReinvest example you showed above that generated the CG unrealised gains report and post that here as a file/export backup file? I want to see why my CG report differs from yours....

    For me DivReinvest's work well, my problem is Equalisation payments (ROC), but just about get away with doing Sell Zero shares for this. But Accumulation funds are always an issue for me...

  13. 13 Posted by jerryxe on 10 Sep, 2021 05:18 PM

    jerryxe's Avatar

    Hi Stuart,

    I created a new dataset, and only created an investment account with a fake stock ABC, and did the same thing. See screenshot.

  14. 14 Posted by Stuart Beesley ... on 10 Sep, 2021 05:36 PM

    Stuart Beesley - JUST A FELLOW USER and Toolbox ‘guy’'s Avatar

    Interesting! If you edit your security and change it to Avg Cost control, then the Capital Gains report goes bonkers... Take a look......

    Did you try the Investment Performance Report?

  15. 15 Posted by jerryxe on 10 Sep, 2021 05:50 PM

    jerryxe's Avatar

    I set to lot matching (though there is no sales yet), for the above screenshot. And in this setting, I checked investment performance report (screenshot 1), it does tell me a $1,000 return, which is good. Though it didn't tell me the cost (it says Buys is $11,000, Gains is $0, Return is $1,000, Income is $1,000), so a little bit confusing reading the report, but guess I can live with it.

    If I change to avg cost, Capital Gain report is complete wrong (screenshot 2), no change to Investment performance report.

    Since I prefer to use MD to mimic my tax cost basis, I will continue to use lot matching.

  16. 16 Posted by Stuart Beesley ... on 10 Sep, 2021 05:58 PM

    Stuart Beesley - JUST A FELLOW USER and Toolbox ‘guy’'s Avatar

    Yup. The CG report for unrealised gains is utterly broken with different wrong results when either lot control or avg control is selected. I hope @sean is watching this thread.

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