What Does "In Specie" Mean?
“In specie," a Latin phrase meaning "in its actual form," describes the act of distributing an asset in its current form, rather than selling the object and distributing the cash proceeds to the end recipient. In specie distributions are typically made when cash isn’t readily available or when it’s simply more practical to hand over the asset in lieu of cash.
In Specie Explained
In specie transactions can involve either physical possessions or financial assets. Companies or individuals might distribute land, equipment, or even inventory, for capital returns, rather than money. In some instances, financial assets such as stocks, bonds, warrants, or other securities may be distributed to shareholders, in capital return programs.
For example, shares of stock may be distributed to investors, when cash is in short supply. This particular type of in specie distribution is frequently made in the form of fractional shares, where an investor might receive 0.5 shares for every single share he currently holds.
Aside from cash being in short supply, tax considerations may factor into the in specie practice. Generally speaking, taxes are based on cash flows and are only paid on realized capital gains. Consequently, paying for a company with shares of stock instead of cash, essentially means the gains for the seller remain unrealized, so sellers aren’t burdened with tax liability, until they elect to sell their newly-acquired stock shares, long after the in specie transaction.
Real World Example of an In-Specie Transfer
Investors often hold securities in brokerage accounts or with financial advisors. If an investor wishes to transfer those assets to another advisor or to a different investment vehicle, such as a trust or an individual retirement account (IRA), he can either liquidate the assets in order to realize the cash, or he may transfer the assets to another account in specie.
The latter option avoids triggering tax consequences and holds the investor's portfolio intact. Contrarily, selling the assets for cash will likely set in motion a taxable event, obligating investors to pay capital gains taxes on any appreciation.