Reinvested dividends are taxed at the time the dividend is paid, not when the shares purchased with those dividends are sold. This is because dividends are considered income by tax authorities, and thus, the income tax is applied in the year the dividend is distributed, even if the investor chooses to reinvest those dividends in purchasing more shares.

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Reinvested Dividends

Question 82

Multiple Choice

Reinvested dividends

A) are taxed when the shares purchased with the reinvested dividend are sold.
B) are taxed at the time the dividend is paid.
C) do not increase the value of an investors holdings.
D) are generally sold at a premium over the market price.

Correct Answer: