What happens to taxes when I reinvest dividends automatically?
Automatically reinvesting dividends does not make them tax-free – in a taxable brokerage account you still owe tax on those dividends in the year they're paid, even though you never saw the cash. The reinvestment simply buys you more shares. Two practical consequences follow. First, each reinvested dividend creates a new tax lot with its own cost basis and holding period, which you must track to calculate gains correctly when you eventually sell; brokers now report this for you. Second, those reinvestment purchases count for the wash-sale rule, so reinvesting near a loss sale can inadvertently disallow part of your loss. Reinvestment is great for compounding, but remember it raises your cost basis over time, which reduces your taxable gain at sale. In a Roth or traditional IRA, reinvested dividends are not taxed at all in the year received.