Cost basis of DRP Shares

[ken561]

I received a certificate for 100 shares of stock that I bought in 1995. A few years later, I signed up for the company's dividend reinvestment plan. After several years I had purchased a dozen more lots of stock through dividend reinvestments. When I closed the DRP account, the company issued a certificate for the whole shares in the plan and a check in lieu of the fractional share. Using the FIFO cost basis method, is the cost basis for the fractional share deducted from the original lot of 100 shares, or from the first lot(s) purchased under the DRP?

[fanfare]

were you reinvesting dividends right up to the end?

If you stopped more than a year prior to selling it doesn't really matter.

Otherwise that fractional share must be among the last shares you bought, not the earliest. Think about it.

[Anonymous]

since the DRP was being used, the purchase of fractional shares occurs every year.    example year 1- 95.7 shares.  year 2 - 4.4 shares.  total 100.1 shares.  so which lot did the .1 shares that were sold come from? 

FIFO is the default cost basis method used by brokers, unless a different method of calculation is selected. Using the FIFO method those you bought the earliest are sold first. If you choose the LIFO method instead, the lots that you bought most recently are sold first. Under the SLI method, you decide which lots are sold on a sale-by-sale basis.

The key point here is that different methods may produce different results for the same sale—for example, in certain circumstances, you might record a gain using the LIFO method but a loss using the FIFO method.

from IRS PUB 550

Identifying stock or bonds sold. If you can
adequately identify the shares of stock or the
bonds you sold, their basis is the cost or other
basis of the particular shares of stock or bonds.
Adequate identification. You will make an
adequate identification if you show that certificates representing shares of stock from a lot
that you bought on a certain date or for a certain
price were delivered to your broker or other agent.

Identification not possible. If you buy and
sell securities at various times in varying quantities and you cannot adequately identify the
shares you sell, the basis of the securities you
sell is the basis of the securities you acquired
first. Except for certain mutual fund shares, discussed later, you cannot use the average price
per share to figure gain or loss on the sale of
the shares.

[ken561]

@fanfare thank you for the reply.

Yes, I never stopped reinvesting dividends, but for the first three years, I participated in the stock agent's DRP.  I then closed that account and transferred the (whole) shares to my brokerage investment account, where I continued (and still continue) to reinvest dividends.  

I am trying to provide my brokerage account the the cost basis of the shares transferred from the agent's DRP.  I have the dates, quantities, and costs of each lot purchased, but I did not specify (and the agent did not indicate) from which lot the fractional share was sold when I closed the agent's DRP account and transferred the whole shares.  Pub 550 says (p. 40)  if you can't adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first.

So my question is:  which are the securities I acquired first?  Are they the original 100 shares I bought years before starting the DRP, or are they the first lots acquired under the DRP?   

[fanfare]

So my question is:  which are the securities I acquired first?  Are they the original 100 shares I bought years before starting the DRP, or are they the first lots acquired under the DRP?   

 You can't reinvest dividends on shares you don't have. The answer is obvious.

Regarding my first comment.

As you buy fractional share with dividends the fractional shares combine into one share. If you have a fractional share it must be the last share or shares you bought and if you continued to reinvest until sale  that fractional share would get ST tax treatment. As would any other full shares acquired less than one year prior to sale.

The basis of your fractional share when you transferred the securities is the price per share on the last day of reinvesting at the old broker times your fraction.

If you were getting less than one share per dividend period, then the calculation is more complicated.