What is the tax treatment of dividends that are reinvested?

Dividends that are reinvested are indeed taxable in the year they are received, which aligns with option C. This means that even if the taxpayer does not take the dividends in cash but instead reinvests them to purchase more shares of stock, the IRS treats these reinvested dividends as income, and they must be reported on the taxpayer's income tax return for that year.

Additionally, when dividends are reinvested, they increase the taxpayer's basis in the stock, as noted in option B. This is important because the basis is used to calculate the gain or loss when the taxpayer ultimately sells the stock in the future. By increasing the basis with the reinvested dividends, the taxpayer is effectively reducing taxable capital gains when selling the shares.

Therefore, the correct answer encompasses both the taxability of the dividends at the time of reinvestment and the increase in the stock basis, validating that both options B and C are accurate and supporting option D as the right choice.