I have a doubt regarding dividend reinvestment plans (so-called DRIPs), the Pie System in Trading212, and Taxes.
I’ve searched a little bit in the forum but I haven’t seen an answer (used mainly “DRIP” as the keyword so), sorry if this question was already answered and I didn’t see…
On to the point: I’m starting investing in Stocks and reading some information, and I read about the benefits of DRIP, and that “capital gains from shares held in a DRIP are not calculated and taxed until the stock is finally sold, usually several years down the road” - source.
As it is obvious, if we’re playing the long run, by paying taxes in the end, we have a “stronger” compound effect during the period we hold the stock.
My question is, having the “Auto Reinvest” option set in the Pie, do I have to declare those dividend earnings in the end of each year or not?
Let me know if I wasn’t clear. Thank you very much.
@Vedran is correct. The liability for tax on a dividend s accrued when it is paid, irrespective of whether or not it is reinvested. Usually one actually pays the tax at some point later in the year after completing a tax return.
If, for example, you receive a dividend from a US company and you are UK taxpayer, then the tax is computed based on the exchange rate pertaining on the official dividend payment date (which may not be the same as the exchange rate used by Trading 212 if there has been a gap of a few days and exchange rate has changed over those days). Tax is paid by a UK taxpayer via self assessment with payments in January and July. For UK taxpayers dividends outside an ISA only become taxable above £2000, so at average yield of 2% one would need £100000 invested and dividend producing for taxes to become due. Other countries have different schedules.
The comoutation of taxes due on dividends retained within accumulating ETFs has been discussed in other posts.