Income Reporting for Attorney Lee's Stock Payment Transaction
How should Lee report the income in connection with the receipt of the stock?
What amount of income should be reported in Lee's current year income tax return for receiving 500 shares of a listed corporation's stock as payment for a $10,000 legal fee?
Income Reporting for Lee's Stock Payment Transaction
Lee received 500 shares of stock worth $8,000 as payment for a $10,000 legal fee, which is less than the amount owed. Therefore, Lee incurred a loss of $2,000. However, Lee will not be able to deduct this loss since the stock was not sold in the same year.
For income tax purposes, the fair market value of the stock at the time it was received ($8,000) should be reported as income in Lee's current year income tax return. This is because the fair market value of property or services received in exchange for services must be included in income, regardless of whether cash was received or not.
Lee should report $8,000 as income in the current year income tax return. The subsequent sale of the stock in January of the following year will be subject to capital gains tax.
Attorney Lee, who uses the cash receipts and disbursements method of reporting, received 500 shares of a listed corporation's stock with a fair market value of $8,000 in full satisfaction of a $10,000 legal fee owed by a client. The client's basis for this stock was $6,000. Since the fair market value of the stock received ($8,000) is higher than the client's basis ($6,000), Lee incurred a loss of $2,000.
However, for income tax reporting, Lee must include the fair market value of the stock received as income in his current year tax return. Therefore, Lee should report $8,000 as income in the current year. The subsequent sale of the stock in the following year will trigger capital gains tax.
It's important for taxpayers like Lee to understand the tax implications of receiving non-cash payments, such as stocks, in exchange for services rendered. Properly reporting these transactions ensures compliance with tax laws and regulations.
In summary, Lee should report $8,000 as income in his current year income tax return and plan for potential capital gains tax on the sale of the stock in the future.