Bartering 101

Bartering is an ancient custom, used for centuries as standard business practice at a time when currency was not available or accepted. It fell by the wayside for many years, however recently there has been renewed interest in this time-honored tradition, and many bartering networks are popping up on the internet and in communities across the country these days. One of the biggest selling points seems to be the belief that since there is no money exchanged, there is no income tax applied to the transaction. But how does bartering work? How do you keep track? And is it truly income tax free?

Here's how bartering works: In essence, bartering is an 'equal' exchange of goods or services between two or more parties. There is no money involved, so most people see it as a great way to save, by not only keeping money out of the equation, but also by not having to pay taxes on the 'income'. Well, sadly, that is not the case, and the government wants its share. You are, in fact, required to pay income tax on most bartering exchanges!
How does one keep track of bartering transactions? Each bartering network has its own rules. However, in general, the way it works is that you sign up with a bartering network. The network uses 'credit units' as a means of exchange. It adds these credit units to your account for the goods or services you provide, and subtracts them as you use these credit units to 'purchase' goods or services offered by other members of the barter club. If you exchanged property or services through barter exchange, Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or a similar statement from the barter exchange should be sent to you by February 17, 2009. It should show the value of cash, property, services, credits, or scrip you received from exchanges during 2008. The IRS also will receive a copy of Form 1099-B.

How do you report a barter exchange? If you are a self employed small business owner, as most barter participants are, you would report this income on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. However, if the barter involves an exchange of something other than services, you may have to use another form or schedule instead, so check with your tax advisor. You must include in your income, at the time received, the fair market value of goods or services you receive in the transaction. If you exchange services with another person and you both have agreed ahead of time as to the value of the services, that value will be accepted as fair market value unless the value can be shown to be otherwise. If you are not in business for what you are bartering, then you may not have to pay income tax on your exchange. Again, check with your tax advisor.

Below are some common examples of bartering exchanges and how they should be handled.

• Example 1: You are a self-employed professional and have performed services for a client, a small corporation. The corporation gives you shares of its stock as payment for your services. You must include the fair market value of those shares in your income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) in the year you receive them.
• Example 2: You are self-employed and a member of an internet or local community barter club. You use the club throughout the year to 'buy' goods and services. You must include in your income the value of the credit units that are added to your account, even though you may not actually receive goods or services from other members until a later tax year.
• Example 3: You own a rental property. In return for rent-free use of this property, the tenant gives you a piece of handmade furniture that she created. You must report as rental income on Schedule E (Form 1040), Supplemental Income and Loss, the fair market value of the item, and the furniture maker must report as income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) the fair rental value of the apartment. As you can see, bartering, while a wonderful practice, usually does not eliminate your responsibility to pay taxes on that income.

So now you know!