Our First Book Learn how to get the most from your stock options or other equity compensation. Having your dividends reinvested through a dividend reinvestment plan may seem a lot like receiving a stock dividend. But the tax rules for stock dividends are different. When a company pays a stock dividend, all shareholders receive their dividend in the form of stock, not just the ones who choose to participate in a dividend reinvestment plan. If you hold stock in XYZ and participate in a DRIP maintained by that company, cash dividends on your stock are automatically reinvested in XYZ stock.
Different companies design their DRIPs with different features.
As a result, the tax consequences of different DRIPs can be slightly different. Some DRIPs acquire stock directly from the company, while others may use your dividends to buy stock on the open market. If the plan buys stock on the open market, it will incur brokerage commission costs, and the date of purchase will not necessarily be the same as the date of the dividend. Some companies that maintain DRIPs will pay brokerage commission costs on purchases made through the plan. In other cases, the commission is paid out of the dividend and reduces the number of shares you receive.