When dividends from a fund are reinvested, those dividends are, in effect, the cost of new shares. Add the dividends to the cost basis of the investors holdings when the investor sells the shares.

Specific Details

You buy fund shares for $5,000 and receive $100 in dividends, which you reinvest in additional shares. Your tax cost basis in the shares is now $5,100.

Potential Savings

If you are in a combined (federal, self-employment, and state) tax bracket of 20%, you could reduce your taxes up to $200 for every $1,000 of income reduction by tracking reinvested dividends.