Occasionally, a company might issue its shares for consideration other than cash. It is not uncommon for a new company, yet to establish a reliable cash flow, to pay for services with shares rather than with cash. This payment and investment method is called stock barter. Similarly, shares might be given in payment for land, or for equipment, or for some other non-cash asset.
What is the proper tax and accounting considerations when you or your client receives stock in exchange for services provided?
These stock barter transactions are unique and should be treated as such. A few things to keep in mind:
- It is important to determine a fair value for the stock. This value is determined by the market price of the shares at the time of the transaction.
- You don’t want to run into accounting errors and lose money.
- Special tax forms need to be filed at the correct dates.
Stock Barter Taxes and Tax Rates
If stock is received in exchange for services, this income should be claimed. The amount of the income will be the fair value of the shares received.
- Form 1099-B, Proceeds From Broker and Barter Exchange Transactions
- Form 1099-MISC, Miscellaneous Income
Stock Barter Accounting
Stock Accountants will record a stock barter with a debit to the company in question, eg: “Investment in [name of the company] $ xxx Service Income $ xxx” and a credit to the “Service Income/Sales” in the same amount.
Determining the Stock’s Fair Value
Even without a receipt of cash to establish the fair value of the shares at the time of the exchange, the transaction still should be recorded at fair value. Best evidence of fair value might be:
- A quoted market price for the shares.
- A selling price established in a recent issue of shares for cash.
- The amount of cash that would have been paid in a cash purchase of the asset or service.
- An independent appraisal of the value of the asset received.
- Other available evidence.
Whichever evidence of fair value seems more clearly evident should be used. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise.