Question

If a cash basis taxpayer chooses to have his dividends automatically reinvested in the corporation's stock, are they reported on the tax return and taxed?

1) True
2) False

Answer 1

It is 1) true that dividends, even if reinvested, must be reported on a cash basis taxpayer's tax return and are subject to tax. Decisions about issuing stock, paying dividends, or reinvesting profits.

Step-by-step explanation:

When it comes to reporting dividends on a tax return, it is true that a cash basis taxpayer must include dividends as income even if they choose to have them automatically reinvested in the corporation's stock.

The Internal Revenue Service (IRS) requires that these dividends be reported as income in the year they were paid, as they represent an option for the taxpayer to take possession of the cash. Though the investor does not receive the cash directly, they have constructive receipt of the income, as it was them who made the decision to reinvest it.

Firms, whether private or public, make decisions on when to issue stock, pay dividends, or reinvest profits. Management and/or the board of directors are typically involved in these considerations. These strategic decisions impact investors' expectations of a rate of return, which can be delivered through dividends or capital gains.

Dividends are a direct payment to shareholders, whereas capital gains are realized when an asset, such as stock, increases in value and is sold at a profit.