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Monday, May 11, 2015

Figuring the Cost Basis if the Property was Received in Exchange for Services

In some cases, property is received in exchange for services instead of money. If you need to figure the cost basis for property received in exchange for services, you will need to determine whether the property that has been received in exchange for services is subject to substantial risk of forfeiture or is restricted as to transfer.


Fair market Value of Property Received in Exchange for Services as Income

If the property exchanged for services is not subject to substantial risk of forfeiture (Section 83) and is not restricted as to transfer, the fair market value of the property is considered income. The fair market value of the property is also considered the tax cost basis.

FMV=Income (if not subject to substantial risk of forfeiture and not restricted as to transfer)

FMV=Tax Cost Basis

Example: Joe worked for a car dealership and agreed to work for a new car instead of monetary income. The fair market value of the car would be the amount of compensation received by Joe and if Joe decides to turn around and sell the car, the cost basis would be the fair market value of the car at the time it was received.

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