Drip Portfolio Report, Feb. 22, 1999

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Accounting For Drips

By George Runkle ([email protected])

ATLANTA, GA (Feb. 22, 1999) -- This week I finally got started on my taxes. In the past few years, it always was a drag because of my wife's home business, which meant tracking expenses, depreciation, and so on. Well, this year we don't have that, BUT (I knew it couldn't be that simple), I cashed in Drips. Yes, to get up the money for the down payment on the Runkle Mansion, I had to sell shares in different Drip stocks. It was difficult to do, I always feel a vague sense of guilt when selling a stock, but it was that or live in a cardboard box. Well, boxes aren't that comfortable in the winter, even in Atlanta, so I had to sell.

Selling out of a Drip is very difficult for other than emotional reasons. Look at your latest statement and you'll see what I mean. Probably every month you are buying fractional shares, and of course there are the dividend reinvestments, which may be only a couple of dollars. When you account for these, you have to figure short and long-term capital gains, and your cost basis of everything. Depreciation of the fence we put in our backyard for the old day care business was probably a lot easier.

Is there any easy way to do this? One time I went to a talk by Chuck Carlson, who has written a number of books on Drips, including Buying Stocks Without a Broker. Also, in the early days of Fooldom (when we were all unpaid volunteers), he was one of us, going by the online name MF DRIPS. Chuck was asked this very question, and he suggested selling out the whole Drip account, which makes the cost basis much easier. However, you still will get long and short-term gains, with the fractional shares. It makes the process easier, but you still have a lot of work to do.

OK, there is an easier solution. In fact it's so easy I've had to work my way up to it the long way. There is a little thing we engineers have learned a while back. Often the harder it is for a human to do something, the easier it is for a computer to do it. It also works the other way around. So, while your PC can't figure out if it likes Coke or Pepsi better, it doesn't get angry trying to figure out the sale price of 0.438 shares of Coke, and how much you paid for it, and how long you held it. It's just arithmetic. It's all in the software.

I used Quicken, which did all the work for me. You can also buy the Drip-friendly Foolish Portfolio Tracker from Foolmart (a shameless promotion). Both programs will track your returns, update your portfolio values, and allow you to chart your different stocks. There are other excellent programs out there that do the same thing. It's really not too difficult to program; it's just hard to do by hand. While I definitely want to push our Fool products, Quicken exports all your results to Turbo Tax, which makes life much easier at tax time.

The big rub is you have to enter the data. As they say, "garbage in, garbage out." Every month when I get my Drip statements, I put in the shares purchased, dividends reinvested, and contributions. Without that, my taxes would be much more difficult this year. You really don't have to do the data entry every month, since most statements show the year to date. If you were somewhat on the lazy side, you could enter all those purchases, reinvested dividends, sales, etc., from the end of year statement. I usually check everything I've done from that statement.

So, in the end, my taxes this year are embarrassingly simple. The most difficult part about selling those Coca-Cola shares was, well, selling them. As long as you enter the information, the computer can do the rest for you.

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