What is date acquired for Dividend reinvestment shares when those shares are added to account on cash payable date given that someone trades for them 3 days earlier?

[arthur19]

IRS Instructions for Form 8949 provides the following: On page 2, “To figure the holding period, begin counting on the day after you received the property and include the day you disposed of it.” 

IRS Pub 17 provides the following: For securities traded on an established securities market, your holding period begins the day after the trade date you bought the securities.

Shares are not received in my account until the dividend payable date which coincides with the settlement date for the trade the brokerage executes to purchase the shares.

The two choices are the shares are acquired on the trade date (even though it is not your direct trade) or the payable date of the dividend being received (which is when you receive the shares in your account).

[Anita01]

Are you saying you received dividends which were reinvested and then you immediately sold those shares?

[arthur19]

No, I'll provide an example. On Mar1st Company A paid their quarterly dividend and I received $xx.xx into my account. I participate in a dividend reinvestment program. Also on Mar 1st, my account was debited for $xx.xx and yy shares of Company A appeared in my account. In order for those shares to be available simultaneously with the cash dividend, the dividend reinvestment program executed trade(s) on February 27th for the total needed for all program participant in order for the trade to settle on Mar1st and be placed in participant's account on Mar 1st. So the question is when did I acquire the shares, on Feb 27th when the program executed bulk trade(s) or on Mar 1st when I received them in my account.

[Anita01]

converted to answer

[Anita01 · Accepted solution]

March 1 when you received the shares.  That's when you actually used the dividend money to purchase the shares and that's the date you would use at any point when you choose to sell stock and the day after that would be used to determine your holding period.  The company's purchase did not cause you to own the stock.

[arthur19]

Thank you for the reply. I agree completely; however, the investment company that holds my accounts recently decided to change the date acquired to be the trade date. The following is a real transaction.  I sold shares of Company A on Dec 28th of 2017 to include yy shares which were obtained as a reinvested dividend on Dec 30, 2016 (the dividend payable date). Those shares were part of bulk trades made on Dec 27, 2016 by the investment company in the course of their dividend reinvestment program so that their settlement would occur and the shares would be available to credit my (and others) accounts on Dec 30. I assume those shares would be a short term capital gain however, the 1099 B classified it as long term because it used the Dec 27, 2016 trade date and not the Dec 30th dividend date when I received the dividend and the shares. Sorry it is so wordy but precision in terminology is important in this situation.

You and I are applying logic. How would you suggest getting a definitive interpretation. I should add the investment company refuses to answer why they changed. The IRS Pubs I have looked at suggest if you don't know when you acquired the stock, consult your 1099B.

[Anita01]

What reinvestment price did they give you for the purchase of the shares with the dividend? Was it the price they paid on the 27th or a price from the day you reinvested?

[arthur19]

The program knows in advance the total value of all dividends enrolled in the program and uses that figure to purchase the "most dividends" they can with that total on the trade date. Each participant receives their allocation of shares based on the average price for all shares purchased. The price is then based on the trade date and not the dividend payable date.

[Anita01]

I can only surmise that you have an account where stocks can be purchased and held in street name, meaning the broker buys it and holds it in their name.  They can show this as allocation to  your account because you have all rights to the stock at the time they purchase it.

Since the dividend amount has not yet been received by you, they must have a mechanism for charging you some interest for having used the broker's own money to buy the stock.  Following that line of thought, I see nothing wrong with them pre-purchasing stock for you and then using that date as the date of purchase.  If I were you, however, I would want to ask them about the interest or commission charge for this purchase.

[arthur19]

Thank you. It seems that the dividend reinvestment program is composed of two processes operating in parallel. The book keeping for the dividend payments and kind of an open ended stock purchase plan in which the broker has an "open, non-numeric specific" authorization to purchase shares in a manner timely to use the cash dividend payment for trade settlement. I can get my head around that and your description of the process as an allocation of the brokerages holdings fills some gaps.
The problem I am left with is why did they change from the dividend payable date about 18 months ago.  I cannot find anything to cause the change.

Thank you for your conversation. I will mark this as answered. If you happen to ponder this further, please comment again. If I ever get an explanation, I will add that.

[Anita01]

I suspect they may have started his program recently as a reason to charge you interest for the transaction, which is why I recommended you inquire about the charges for this.