Are stock dividends taxable?

The short answer, and what it depends on

Companies sometimes pay a dividend in additional shares rather than cash. Publication 550 calls these distributions of stock and treats the ordinary version as a non-event for tax: you receive more shares, but you have not received income, so nothing goes on your return that year. The tax is deferred, not forgiven. Because the same total investment is now spread across more shares, your cost per share falls, and the gain or loss shows up when you eventually sell.

The rule has exceptions, and they matter because a taxable stock dividend is reported as dividend income at the shares’ fair market value on the distribution date. The publication lists five situations in which a stock dividend or stock right is taxable. First, you or another shareholder has the choice of receiving cash or other property instead of stock. Second, the distribution gives cash or property to some shareholders and increases the percentage interest of others in the corporation’s assets or earnings. Third, it is a distribution of convertible preferred stock with the same effect as the second case. Fourth, it gives preferred stock to some common shareholders and common stock to others. Fifth, it is a distribution on preferred stock, except an increase in the conversion ratio of convertible preferred made solely to account for a stock dividend or split.

How to split your basis (nontaxable stock dividend)

For a nontaxable stock dividend you must divide the basis of your old stock between the old and the new shares. The method depends on whether the new stock is identical to the old.

Identical stock. Divide the adjusted basis of the old stock by the total number of old and new shares. The publication’s first example: you own one share bought for $45, and the corporation distributes two new shares for each share held. You now have three shares, and your basis in each is $15 ($45 divided by 3). The second example has two lots. A share bought for $30 becomes three shares at $10 each, and a share bought for $45 becomes three shares at $15 each. If you bought at different times and prices, allocate each lot’s share of the new stock to that lot, so every lot keeps its own purchase date and cost.

Different stock. If the new stock is not identical, such as preferred stock distributed on common, you divide the old basis in proportion to the fair market value of each class on the distribution date. The publication’s example: common stock bought for $100, then one share of preferred is distributed per share of common. The common is worth $150 and the preferred $50 on the distribution date, so the common keeps $75 ($150 divided by $200, times $100) and the preferred takes $25. The calculator above does both calculations. Enter total basis and share counts, and choose identical or not.

What happens when the stock dividend is taxable

If a stock dividend is taxable when you receive it, the basis of the new stock is its fair market value on the distribution date, and the basis of your old stock does not change. You include that fair market value in income. A taxable distribution therefore does two things at once: it creates income now and it gives the new shares a fresh, higher basis.

Stock rights, meaning rights to acquire stock, follow the same pattern. The publication says stock rights are rarely taxable when received. If you receive nontaxable rights and let them expire, they have no basis.

Fractional shares and scrip

If a stock dividend leaves you with a fraction of a share and the company sells the fractional shares and pays you the cash, the cash is treated as an amount realized on a sale. You report it on Form 8949. A scrip certificate for a fraction of a share is generally not taxable when received. If you have the corporation sell the certificate for you, your gain or loss is the proceeds minus the part of your basis allocated to it. A scrip certificate you may redeem for cash instead of stock is the exception: it is taxable when you receive it, at its fair market value.

Stock splits

The publication says to figure the basis of a stock split the same way as a stock dividend when identical stock is distributed on the stock you hold. In practice a two-for-one split on a share with $50 of basis leaves two shares with $25 each, Nothing is reported until you sell.

Worked example for a sale

Suppose you own 100 shares with a total basis of $3,000 and receive a nontaxable stock dividend of 20 identical shares. Your 120 shares now have a basis of $25 each ($3,000 divided by 120). If you later sell 60 shares for $40 each, your amount realized is $2,400 and your basis is $1,500, a $900 gain. Without the split you would have used $30 a share and understated your gain. Check that the basis on your Form 1099-B reflects the split, and keep the corporation’s notice of the distribution.

Limits of this page

Dividends paid in cash, and cash dividends reinvested in more stock, are different and are generally taxable income; see are dividends taxable. For the gain on selling your shares, use the capital gains tax calculator.

Sources

• IRS Publication 550, Investment Income and Expenses (2025): Distributions of Stock and Stock Rights, chapter 1, and Stock dividends, Stock splits and Stock rights under Basis in chapter 4. Page last reviewed or updated by the IRS April 30, 2026. Read November 2, 2026.

Edition read: Publication 550 (2025), for use in preparing 2025 returns. Dollar limits and thresholds quoted on this page are for 2025 and can change; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it. Marked for human review.