Do I Have to Pay Tax on Reinvested Dividends?

When companies generate profits, they may distribute a portion of these earnings to their shareholders in the form of dividends. Investors often have the option to receive these dividends as cash or to reinvest them, purchasing additional shares of the company or fund.

Understanding How Dividends Are Taxed

Dividends received from investments are considered taxable income in the year they are distributed, regardless of whether they are taken as cash or reinvested, as the income is taxable when it is made available to you. The tax treatment of dividends depends primarily on whether they are classified as “qualified” or “ordinary” (non-qualified) dividends.

Ordinary dividends are taxed at your regular federal income tax rates, which can range from 10% to 37% for the 2025 tax year. These include most dividends paid by real estate investment trusts (REITs), money market accounts, and those from employee stock options. Qualified dividends, conversely, are eligible for preferential long-term capital gains tax rates, which are lower than ordinary income tax rates. To be considered a qualified dividend, the stock must meet specific criteria, including a holding period requirement. The stock must have been held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

Calculating Your Tax Obligation

Ordinary dividends are added to your other income and taxed at your marginal income tax bracket. For instance, if your taxable income places you in the 22% bracket, your ordinary dividends will also be taxed at 22%. The tax rate for ordinary dividends can be as high as 37% for higher earners.

For the 2025 tax year, these rates are 0%, 15%, or 20%, depending on your taxable income and filing status. For example, single filers with taxable income up to $48,350 in 2025 may pay 0% on qualified dividends. Those with higher incomes, such as a single filer with taxable income between $48,350 and $533,400, would pay 15%. The 20% rate applies to very high earners, such as single filers with taxable income exceeding $533,400.

Additionally, some higher-income taxpayers may be subject to the Net Investment Income Tax (NIIT). This is a 3.8% surtax on certain investment income, including dividends. The NIIT applies to individuals whose modified adjusted gross income (MAGI) exceeds specific thresholds: $200,000 for single or head of household filers, and $250,000 for those married filing jointly. The tax is applied to the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold.

Reporting Reinvested Dividends

Financial institutions are responsible for reporting dividend income to both you and the Internal Revenue Service (IRS). They issue Form 1099-DIV, Dividends and Distributions, by early February each year. This form provides details needed for your tax return. Box 1a on Form 1099-DIV shows the total amount of ordinary dividends you received, while Box 1b specifically reports the portion of those dividends that are considered qualified.

While you do not submit Form 1099-DIV with your tax return, you must use its information to prepare your federal tax forms. If your total taxable interest and ordinary dividends exceed $1,500, you will need to file Schedule B (Form 1040), Interest and Ordinary Dividends. On Schedule B, you list the payer and the amount of ordinary dividends. The total ordinary dividends from Schedule B are transferred to Form 1040. Qualified dividends are also reported on Form 1040, often requiring a separate calculation for their lower capital gains rates.

Adjusting Your Investment’s Cost Basis

When dividends are reinvested, they increase the cost basis of your investment. Cost basis represents the original value of an asset for tax purposes, the purchase price plus any commissions or fees. For instance, if you buy shares for $1,000 and later reinvest $50 in dividends to acquire more shares, your new cost basis for that investment becomes $1,050.

This adjustment reduces the taxable capital gain when you eventually sell the investment. A higher cost basis means a smaller difference between your selling price and your adjusted cost. If you sell the investment for $1,200, with an original cost basis of $1,000, your capital gain would be $200. However, with the reinvested dividends increasing the basis to $1,050, your capital gain on the sale would be reduced to $150 ($1,200 – $1,050). This lower capital gain translates to a smaller tax liability upon the sale of your investment.