Q : I have a question about tax liability for stocks and mutual funds kept in a brokerage account. Am I obligated to pay any taxes on either the stocks or the mutual funds if I only reinvest the dividends and don’t sell any of the products? I know I must pay capital gains when I sell but what happens when I simply keep them?
A : Great question that is often times confusing.
Yes, you are required to pay taxes on the dividends that you reinvest in taxable investment account (non-IRA). The additional shares that you “purchase” with these dividends is added to your cost basis of the investment and thus you do not have to pay taxes on the capital gains for that portion when you sell the investment in the future.
Please speak with a qualified tax advisor for confirmation and applicability to your personal situation before making any tax decisions.