What happens to the cost basis of shares when a stock dividend is declared?

When a stock dividend is declared, shareholders receive additional shares based on the number of shares they already own, typically without any additional cost. The overall investment in the stock remains the same; however, the total number of shares increases.

To maintain the integrity of the investment, the cost basis per share is adjusted. Since you now own more shares but your total investment value has not changed, the cost basis per share decreases. The original cost basis is divided by the new total number of shares, leading to a lower per-share cost basis. This reflects the fact that each individual share is now effectively representing a smaller portion of the total investment value.

Thus, selecting that the cost basis per share is reduced accurately describes the financial impact of receiving stock dividends.