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Understanding Cost Basis Adjustments for Reinvested Dividends and Stock Splits

When you own investments such as stocks or mutual funds, it is crucial to maintain accurate records of your cost basis. The cost basis is the original value of an asset for tax purposes, usually the purchase price, adjusted for stock splits, dividends, and return of capital distributions. This figure is used to determine the capital gain or loss when you sell the asset, which is important for tax reporting purposes.

Scenario	Description	Handling Method
Reinvested Dividends	Dividends that are reinvested to purchase more shares of the security increase your cost basis in the investment. Each reinvestment is essentially a new purchase, with its own cost basis.	Most banks and brokers track these reinvestments and adjust your cost basis accordingly. It is important to review these calculations to ensure accuracy. If you find an error, you should contact your financial institution to correct the record.
Stock Splits	A stock split increases the number of shares you own while decreasing the price per share, without affecting the total value of your investment. This event requires an adjustment to the cost basis per share.	Your financial institution should automatically adjust the cost basis of your shares after a stock split. However, you should verify that the adjustment has been made correctly. If the cost basis is not adjusted, or if there is an error, you should contact your broker to update your records.

When to Adjust or Override Cost Basis

While financial institutions generally handle these adjustments, there are instances where you may need to adjust or override the cost basis:

• If you transferred securities from one broker to another and the cost basis information was not transferred correctly.
• If you discover discrepancies due to incorrect reinvestment amounts, stock splits, or other corporate actions not properly accounted for.
• If you have specific tax lot identification needs that differ from the default method used by your broker.

To adjust or override the cost basis, you should:

1. Review your investment statements and tax documents for accuracy.
2. Gather all necessary documentation, such as trade confirmations or corporate action notices.
3. Contact your financial institution to discuss the discrepancy and provide the necessary documentation to support your claim.
4. Follow up to ensure that the adjustments have been made and that your records are now accurate.

Conclusion

Accurate cost basis calculation is essential for proper tax reporting. While banks and brokers typically handle these adjustments, it is the taxpayer's responsibility to ensure that all information is correct. Regularly reviewing your investment records and promptly addressing any discrepancies will help avoid potential issues when reporting capital gains or losses on your tax return.