Bartering – the Oldest Form of Trade is Still With Us, Part III
Since it is difficult to get an exact match where two businesses need equal amounts of each other’s products or services, the opportunities for direct barter transactions are limited. That’s where a barter exchange network comes in. The network deals in units of currency called trade dollars. The goods and services of one company in the network are exchanged for trade dollars that can be used to purchase the goods and services of any other company in the network. The network functions as a record keeper, sending each client a monthly statement and charging a fee usually 5% to 7% for each side of a transaction.
Do I have to pay tax on my bartering income?
Yes. You have bartering income when you exchange goods or services without exchanging money; or the full amount of money. The goods or services exchanged have a dollar or fair market value, and this value must be included on the tax return of both parties as bartering income.
The IRS considers barter exchange networks to be legal third-party record keepers, similar to banks, brokerage houses and other firms that deal with taxpayer records. Barter exchange networks are required to complete and submit Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” for each of their members and the IRS.
Let’s assume you are a house-painter and you paint a dentist’s house. The dentist pays you $5,000 for the work. You have $5,000 of income. Then you go to the dentist and get implants for which you pay him $5,000. He has $5,000 of income. If you just trade the work (you paint his house in exchange for the dental implants) you get the same result. You each have $5,000 of taxable income. The fact that the cash did not pass back and forth does not mean that there is no taxable income.
The fair market value of the goods and services exchanged must be included as income for both parties. Generally, barter income is reported on Schedule C, Profit or Loss from Business Form 1040.
Part IV to come next week; until then,