Bartering – the Oldest Form of Trade is Still With Us, Part I

“The propensity to truck, barter and exchange one thing for another is common to all men, and to be found in no other race of animals.”
Adam Smith

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. Barter may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third party basis through a modern barter exchange company.

The earliest economic transactions were simple exchanges. I trade you my arrowhead for your feathers. Money emerged as an intermediate commodity. With an intermediate commodity (whether it be seashells, rum, gold, or whales’ teeth) you could sell your fruit when it is ripe in exchange for the intermediate commodity. You could then use the intermediate commodity (money) to buy wheat when the wheat harvest comes in.

If you engage in barter transactions you may have tax responsibilities. You may be subject to liabilities for 1) income tax, self-employment tax, employment tax, or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

Barter dollars or trade dollars are identical to real dollars for tax reporting. If you conduct any direct barter – barter for another’s products or services – you will have to report the fair market value of the products or services you received on your tax return.

Reporting Bartering Proceeds

If you barter your products or services through a barter exchange, you should receive a Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The amount shown in 1099-B Box 3 Bartering is your barter transactions proceeds and is generally reportable as income and must be included on your tax return. Barter exchanges have an annual obligation to report your bartering proceeds to the IRS.

Tune in next week for more on Bartering.