Reporting Barter Transactions

Bartering is one of the most ancient forms of commerce and involves the trading of a service or product for another. While our ancestors may have traded corn for eggs, today we might barter an auto repair for lawn service. Another example would be trading home improvement work for dental services. Typically, no cash is exchanged in the transaction, and business owners can save cash by bartering to get the products and services they need. In any case, the fair market value of the goods and services exchanged must be reported as taxable income by both parties.

Bartering may be done informally on a one-on-one basis between individuals or businesses, or it can take place on a third-party basis through a barter exchange company. Barter exchange companies increase the scope and customer base for anyone wishing to barter goods and services from one company to another within the membership base. Income from bartering is taxable in the year the exchange is made, and taxpayers may be liable for income, self-employment, and excise taxes. Barter transactions can result in ordinary business income, capital gains and losses, or nondeductible personal losses.

Barter or trade dollars from a barter exchange company are identical to real dollars for tax reporting. If taxpayers barter products or services through a barter exchange, they should receive Form 1099-B (Proceeds from Broker and Barter Exchange Transactions) showing their barter transaction proceeds, which are generally reportable as income on their tax return. If taxpayers directly barter a product or service for another’s product or service, they will have to report the fair market value of the products or services received on their tax return.

Example: Barter transaction.

Alex, a painting contractor, requires legal representation for a lawsuit. He engages Alice as legal counsel to represent him during the litigation. Alice charges Alex $5,000 for her work on the case. Being short of cash, Alex agrees to paint Alice’s office building in exchange for her $5,000 fee. Both Alex and Alice must report $5,000 of taxable gross income during the year the exchange took place. Since Alex and Alice each operate a viable business, they are entitled to deduct any business expenses resulting from the barter transaction.

In summary, taxpayers should treat barter income as they would any other income, report any taxable transactions, and keep accurate records to support those transactions.

 

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