Are Dividends from DRIPs Taxable If They're Reinvested?
Q. If you reinvest your dividends in a DRIP, are the dividends taxable in the year in which they were received, even if they're reinvested?
A. Yes, the dividends earned by stocks that you own are taxable, whether you receive them as cash or reinvest them in purchases of additional shares.
However, assuming that the dividend payment meets the IRS qualifications, your dividends received will be taxed at a lower tax rate of 15% (10% for some low-income individuals), instead of at the higher ordinary income rate. The rules for determining if a dividend qualifies for the lower tax treatment are somewhat complex, but are geared towards long-term holdings. Dividends from REITs and some financial companies may also not qualify for the lower rate.