Potential for income taxes: Unless an investor establishes dividend reinvestment within a tax-advantaged account, such as an Individual Retirement Account (IRA), dividends from a DRIP stock or other dividend-paying investment are taxable as income to the investor in the calendar year they are distributed, even if they are immediately reinvested.
Tracking cost basis: Maintaining tax records can be difficult with a DRIP. Generally, dividend reinvestment has its own cost basis for capital gains tax purposes, which is based on the purchase price and any associated fees or commissions.
No control over timing of purchases: With a DRIP, the investor cannot choose the reinvestment schedule. It is common for dividend-paying stocks to pay dividends quarterly, and the reinvestment will follow the same schedule.