Future Business Leaders of America (FBLA) Entrepreneurship Practice Test

When stock is transferred to an individual in exchange for services, how is the transaction treated?

1. Taxable income for the individual

2. Non-taxable income for the individual

3. Taxable income for the company

4. Non-taxable income for the company

The correct answer is: Taxable income for the individual

When stock is transferred to an individual in exchange for services, the transaction is considered taxable income for the individual receiving the stock. This is because the Internal Revenue Service (IRS) views stock received as compensation for services rendered as ordinary income. The fair market value of the stock on the date of transfer is included in the individual's taxable income, making it subject to income taxes. This reflects the general principle that compensation for services, whether in cash or in kind (such as stock), is taxable because it is seen as a form of remuneration for work performed. The individual will typically need to report this income on their tax return, and any gain or loss from future sale of the stock will also be calculated based on this initial value for capital gains purposes. In this context, the other options would not hold true. Non-taxable income for the individual or for the company does not apply because income received in exchange for services is inherently taxable. Additionally, while the company could potentially incur deductible expenses related to the issuance of stock, this does not negate the tax implications for the individual receiving the stock as compensation.