I sold ESPP stocks this year and am figuring out the cost basis for my Schedule D. The stocks are purchased with a certain dollar amount from each paycheck. When adding the total purchase cost of stock, should I also include the amounts that were purchased with dividends, or should I ignore these figures since I did receive a 1099-DIV with the dividend amount on it. Help! Thanks!

The cost basis represents the original value of an asset that has been adjusted for stock splits, dividends and capital distributions. It is important for tax purposes because the value of the cost basis will determine the size of the capital gain that is taxed. The calculation of cost basis becomes confusing when dealing with mutual funds because they often pay dividends and capital gains distributions usually are reinvested in the fund.

For example, assume that you currently own 120 units of a fund, purchased in the past at a price of $8 per share, for a total cost of $960. The fund pays a dividend of $0.40 per share, so you are due to receive $48, but you have already decided to reinvest the dividends in the fund. The current price of the fund is $12, so you are able to purchase four more units with the dividends. Your cost basis now becomes $8.1290 ($1008/124 shares owned).