Liquidating dividend cost method

If you do expect undistributed earnings to be paid out in the future, then you could make a case for applying the DRD to the undistributed earnings in the current period.In some cases, the deferred tax liability related to undistributed earnings from an equity investment can grow quite large over time.If you previously sold shares of the same security, the cost basis of the shares you still own depends on the method that you use to determine cost basis.Any transaction that increases or decreases the number of shares in a position can affect cost basis.However, companies rarely pay "catch-up" dividends. In other words, a company is unlikely to distribute earnings in the future that it declined to distribute in the past.

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The concepts above are implemented in the following comprehensive example, where we assume a simplified P&L and balance sheet to focus on key takeaways, which are highlighted in yellow.If you don't, when you sell shares of that investment, you'll have to pick a method before you can complete the transaction.Even if you've already selected—and even used—one of these cost basis calculation methods, you can change it for future sales whenever you want.* And you can apply those changes to just one fund or to all the funds within an account.These earnings may be distributed as cash dividends, or retained by Company B.To the extent Company A's share of Company B's earnings are distributed as cash dividends, the Cash taxes are paid by the investor only on cash dividends received.

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