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Barter Taxes

Numerous barter exchanges exist to bring together those who wish to trade goods or services with each other because of the difficulty of first turning their goods and services into money. Proponents of barter advance two principal reasons for bartering:

  • as a financing tool - rather than spending cash to obtain needed supplies or services, a business can trade its own excess capacity, unbilled time, or slow-moving inventory for it.
  • as a marketing tool - barter is a way to avoid advertising discounted prices for your unsold goods or services, thus weakening the ability to maintain your list prices in the future.

In fact what is happening, is that the two parties to a bartering agreement are simply setting the price for their bundle of goods or services and that of the other's bundle of goods or services at an equal price.

Since the trade is really a sale between the parties, the IRS requires this trade to be reported at it's fair market value on a Form 1099-B. For example, suppose a painter paints a merchant's home in exchange for a TV. If the house painting and TV really have fair market values of $500 each, each person would have to report $500 of income. Moreover, since the painting was done on the merchant's home rather than on his business, the merchant would not be able to claim his cost for the TV as a business expense.

Before considering barter, consult your tax advisor. Attempting to use barter as a way to under report taxable income (by under or over valuing the goods or services traded) can land you in trouble with the IRS.

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