Post
by **sscritic** » Sat Mar 15, 2014 9:07 am

I agree that you are better off taking the dividends, but I don't agree with some of the reason's given.

At the end of this month, you are going to get a random amount of money as dividends. Let's call that X.

If you take cash, you end up with X. If you reinvest, you will have shares worth X on that day. If you sell those shares the next day, you will have X + Y, where Y is the change, positive or negative, in the value of the shares you bought for X. Y is most likely less than 1% of X. Since Y can be positive or negative, you might have a gain or a loss to report on your taxes.

One way, you have X to spend, the other you have X + Y to spend.

Now if you define the problem as "I want Y to be zero, because I really need to have exactly X to spend," then you don't really have a choice. The part I don't understand is why you need exactly X, a random number, and not X + Y, another random number that is very close to X.

To me, the difference between the two is that one requires more reporting on your tax return since you have to report your sale, which would be four lines on Form 8949, one for each quarterly dividend. The reason for taking the dividends is that on average you won't gain anything by taking the shares and selling, but you do complicate your taxes. The reason is not because you will have a gain that has to be taxed, as you might have a loss since Y can be positive or negative.

Note that I didn't sell a dollar amount. When you use specific ID, you can't sell dollar amounts, you can only sell specific numbers of shares. With specific ID, the shares sold will be the brand new shares, and the gains and losses will be short-term. If you want to sell dollar amounts, you have to use average basis, which, in your situation, will generate gains. So the reason that Dale and others say that you will have gains is that they are assuming that you have to use average basis, but you only have to use average basis if you insist that X is exactly the amount of money that you need to spend and that X + Y is just completely wrong.

So yes, take the dividends because of the more complicated tax return, not because you will always have gains if you take shares and sell. You have roughly an equal chance of having a loss on your sale. Again, this assumes you are not fixated on having exactly X to spend.