Some corporations allow investors to choose to use their dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. If you are a member of this type of plan, you must report the fair market value on the dividend payment date of the dividends that are reinvested as income on your tax return. You do not actually show that the dividends were reinvested on your return. Keep records of the dollar amount of the reinvested dividends, the number of additional shares purchased, and the purchase dates. You will need this information to establish your basis when you sell the shares.

Report the dividends that were reinvested with your other dividends, if any, on Form 1040 (PDF) or Form 1040A (PDF). If your total income from ordinary dividends exceeds a dollar amount set by law, you also must file either Form 1040, Schedule B (PDF) or Form 1040A, Schedule 1 (PDF).

For more information on this and other types of dividend reinvestment plans, refer to Ordinary Dividends in Chapter 1 of Publication 550, Investment Income and Expenses.

References:

• Publication 550, Investment Income and Expenses
• Form 1040, Schedule B (PDF)
• Tax Topic 404, Dividends

Source: www.irs.gov