I believe dividends are considered as an income and if you reinvest using DRIP it won't be income but capital gain later when you sell the stock?

What are some advantages and disadvantages of doing DRIP Vs. Collecting cash dividend in a taxable account?

If it's a non sheltered account, the dividend is considered to be income and is taxable whether you reinvest it or not. If you reinvest, capital gains on those newly purchased shares are not taxed until sold.

I don't think that there are any significant advantages and disadvantages of doing DRIP vs. collecting cash dividend in a taxable account other than the last one.

1) You'll save some commissions of your broker reinvests at no charge. Most DRIP plans charge none.

2) If you don't reinvest, you'll build cash toward another purchase. It's a choice rather than an adv or disadv.

3) Here's a sneaky one from the gubbermint. If you close a long equity position at a loss, it will be considered a wash sale violation if you buy any shares in the 60 day window around the sale date (30 days before and 30 days after). A DRIP purchase can unexpectedly trigger a wash sale violation, no matter how small it is, if it occurs in that 60 day window. So if you intend to claim that loss for the current tax year, make sure that you shut down the reinvestment whether it's in your brokerage account or in a company DRIP plan.

  • 2
    Wash sales aren't really a "violation" -- they complicate tax reporting, but loss deduction is only disallowed on the number of shares that were purchased around the time of the sale. In addition, the basis of those purchased shares is increased to compensate. So while the accounting inconvenience is there no matter how small the purchase, the dollar impact is small and it only represents a delay, not surrender, of a tax benefit. – nanoman Aug 10 at 4:13
  • I think your #2 is misleading in terms of human psychology. Most of the time, DRIPs are better, because they ensure that your dividends will be reinvested and thus take advantage of compounding growth. Most humans who take cash dividends will just let them sit there, getting eaten by inflation, with no compensatory advantage. Unless you have a specific plan in mind for the cash dividends you should probably reinvest them. – BrenBarn Aug 10 at 7:23
  • @nanoman - In the US, the description "wash sale violation" is a common usage. Google it for examples. Anyone who has incurred a wash sale understands that it's merely an accounting complication. In and of itself, a wash sale is not a problem unless it's a carryover violation. Then, it affects two tax returns. marketwatch.com/story/… – Bob Baerker Aug 10 at 11:54
  • @BrenBarn - As I said in #2, not reinvesting dividends is a choice rather than an advantage or a disadvantage. Reinvesting them provides compounding (if share price appreciates) but there are times when one does not want more shares. Perhaps one is neutral on the DRIP stock. Or maybe on has a sufficient amount of one stock and wants to accumulate another. Or whatever the reason. But I'd agree that for the average Joe Schmo who has no investing plan, DRIPs are better, because they ensure that the cash will not be idle. – Bob Baerker Aug 10 at 12:01
  • Is this an answer from a US perspective or is it written with knowledge of Canadian laws and regulation that may apply? – Eric Aug 12 at 18:50

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