What Is In Specie?
The phrase in specie describes the transfer of an asset in its current form rather than in the equivalent amount of cash. In specie distributions are usually made when cash isn’t readily available or when it’s simply more practical to hand over the asset rather than cash. There also are tax benefits to some in specie transactions.
Transferring money from one taxable investment account to another should be done in specie. If an investor receives the cash proceeds, for however brief a time, capital gains taxes kick in.
In specie is a Latin phrase and can be translated as "in its actual form."
- In specie is the delivery of a financial asset in its current form rather than in an equivalent amount of cash.
- In specie transactions may involve either physical assets or financial assets.
- Tax implications may influence the decision to use in specie.
Understanding In Specie
In specie transactions may involve either physical assets or financial assets. Companies or individuals might transfer ownership of land, equipment, or inventory in their actual forms rather than paying cash. In some instances, financial assets such as stocks, bonds, warrants, or other securities may be distributed to shareholders in capital return programs.
For example, a company may distribute shares of stock to investors as a dividend when cash is in short supply. This particular type of in specie distribution is frequently made in the form of fractional shares. For example, an investor who owns 100 shares might receive 0.5, or 50 shares.
Tax considerations also factor into the decision to use in specie. Broadly speaking, taxes are collected on cash income and are due only on realized capital gains. If a company buys out another company and pays with shares of stock instead of cash, the seller does not owe taxes on the gains until those stock shares are sold.
Real-World Example of an In-Specie Transfer
Individual investors generally hold their securities in brokerage accounts or with financial advisors. The investor may decide to transfer the assets to another advisor or put the money into another investment, such as a trust or an individual retirement account (IRA). The investor can either liquidate the assets in order to realize the cash or simply transfer the assets to another account. The latter is an in specie transfer.
The in specie option avoids triggering tax consequences. Taking the cash, for however brief a period, would have obliged the investor to pay capital gains taxes on any appreciation in the investments.