Barter Tax Implications: How to Report Bartering Transactions to IRS

August 25, 2011 | By: Charles P. Corsello, EA

Bartering is the oldest form of commerce, dating back to long before the development of money in its current form.

With the high rate of both unemployment and underemployment, people are forced to get creative in order to obtain the goods and services that they used to be able to pay for in a more traditional manner. Bartering is an excellent way to continue receiving the goods and services that you are no longer able to afford.

Keep in mind, however, that the IRS gets their cut, so you must declare the fair market value of good or services gained through bartering as income on your taxes just as if you had received cash in exchange for them.

How the IRS Defines Bartering

Bartering is another word for trading. If you and another person exchange goods or services without money – for example, building a cabinet for a CPA in exchange for him doing your taxes – you are bartering. Regardless of whether you submitted or received payment in the form of money or with a product or service, you benefited from the transaction, and it is thus considered income in most cases. If you are a business, regardless of your accounting method, bartering is income received.

There are bartering exchanges, or bartering clubs, wherein people come together specifically for the purpose of trading property or services. A barter exchange, as defined by the IRS, is a third-party (whether it is an individual person or a company) that contracts to facilitate trades between various other parties. This term does not apply to individuals who barter on an informal basis, and this is important when it comes to tax records.

Although bartering can be done independent of these organizations, the advantage of a barter exchange is that you do not necessarily have to work out the trade directly with another person; when you provide a product or service to an exchange member, you receive credit, or “trade dollars,” that you can apply toward goods or services that you need from another member of the exchange. This gives you much greater choice and power in your bartering transactions.

Reporting Income from Bartering on Your Taxes

You must declare any income that you have obtained through bartering. If it is part of your business, declare it on Form 1040, Schedule C, Profit or Loss from Business. In most cases, you should be able to deduct the cost of the product or service you provided which in turn lowers your tax liabilities. If it is not part of your business, declare it on Line 21 of Form 1040. Calculate and report the fair market value of all products or services that you received that year in exchange for the ones that you provided. Fair market value is the amount that you would reasonably expect someone to pay for the product or service that you received.

1099-Bs and Barter Club Exchanges

Since barter exchanges act as intermediaries for barter transactions, they must provide each client, as well as the IRS, with Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Anyone who does not declare this income runs the risk of incurring hefty IRS fees and penalties. Form 1099-B is specific to brokers who facilitate barter exchanges.

If you are involved in a barter transaction that occurs outside of a barter exchange, you will not need Form 1099-B but you may need to file Form 1099-MISC. Additionally, if two companies barter with one other and each provides a service for the other (over $600), each company is required to provide the other with a 1099-MISC statement (with a corporation as an exception) in order to report the fair market value of the services that they provided. The IRS requires the companies involved in the transactions to do their own 1099s through a 1099-MISC.

Bartering as a Means of Employee Compensation

If a company uses barter as a means to compensate an employee or provide a bonus, the business can deduct the fair market value of what is being bartered. However, the fair market value of what the employee receives must be accounted for because it is subject to federal income tax withholding and is included in his or her W-2. If the worker is an independent contractor, then their 1099 must reflect the value of services or products given.

The information from either Form 1099-B or Form 1099-MISC is then used to prepare parts of Form 1040. IRS Form 1040 is your general tax return, whereas Form 1099 is a document that details the income amount that you must report on Form 1040.

Why Barter If the IRS Considers It Income Received?

Bartering can have its advantages in many ways. First, bartering may be a useful way to acquire a product or service you need if you are a company with little cash reserves and a ton of items in inventory to trade (maybe you want to stay cash flow positive). The same is true if you don’t have a business and you personally cannot afford something. The only drawback in this situation is you may not be able to write off the services or product you exchanged. Second, in some cases, the fair market value of a product or service might be less than expected which means you end up saving a bit on your taxes. Third, bartering may a way to avoid transactional costs or costs you have to pay to third parties if you didn’t barter. Lastly, bartering can be a nice way to set up new business relationships.

Learn More

There is more information on this in the Barter Exchanges chapter in Publication 525, Taxable and Nontaxable Income. Additionally, it is always a good idea to consult with your tax advisor for more detailed information on how this rule applies to you.