Fair market value is the price an asset would sell for between a knowledgeable, willing buyer and a willing seller under no compulsion to transact. It assumes an arm's-length transaction with both parties equally informed.
Fair market value (FMV) is the most precisely defined valuation standard in U.S. law and practice. The IRS defines it in Revenue Ruling 59-60 (for business interests) and Regulation §1.170A-1(c)(2) (for property) as the price at which property would change hands between a hypothetical willing buyer and willing seller, neither under compulsion, both with reasonable knowledge of the relevant facts. The key elements: both parties are hypothetical (not the actual buyer or seller), both are willing (no forced sale), both are equally informed (no information asymmetry), and the transaction is at arm's length (no special relationships). These conditions distinguish FMV from forced-sale (liquidation) value and from strategic value (which incorporates synergies a specific buyer might realize). FMV is used by the IRS for estate tax, gift tax, charitable contribution deductions, and like-kind exchange valuations. Courts use it in litigation (damages, dissenting shareholder cases). Lenders use it as the baseline for collateral appraisals. Insurance uses it (sometimes via the related 'actual cash value' standard) for casualty claims. FMV is almost always higher than liquidation value because the liquidation scenario violates the 'no compulsion' and 'reasonable time' assumptions of FMV. The gap between FMV and forced-sale value is the liquidation discount — which varies by asset type, market depth, and conditions.
In practice, they're often interchangeable. Technically, 'market value' (used in real estate appraisals) and 'fair market value' (used in tax and legal contexts) share the same conceptual framework. Some appraisal contexts use 'fair value' (a slightly different GAAP and IFRS accounting standard) — which is similar but may incorporate a broader set of assumptions. The differences are technical and context-specific.
When you donate property (equipment, vehicles, real estate, stock) to a charity, the tax deduction is based on FMV at the time of donation — not your cost basis or book value. For donations over $5,000, a qualified appraisal of FMV is required. Overstating FMV on donations is a common IRS audit trigger.
FMV assumes a hypothetical buyer with no special synergies. Strategic value (or investment value) incorporates what a specific buyer would pay due to synergies — cost savings, revenue cross-sell, market share. A competitor acquiring you might pay 2x FMV because of synergies they can realize. FMV is the floor; strategic value can be much higher.