You may not know that you are liable for taxes on barter transactions. You may have heard about some new money exchange systems that have something to do with barter, but keep in mind barter is taxable on value received, and as I understand it, this is always a taxable event! (See IRS links below)
FYI - I designed a barter exchange system that works in complete compliance with the US tax code and researched all the legal and accounting issues. The system manages "private" barters between just two people. It is intended to work with service exchanges of no real or established value (important). Although it could be upgraded to account for value exchanges, this would require the host to file a significant amount of paperwork with the IRS. The following is what I learned - some disturbing facts about barter and the IRS.
The following language was pulled right out of the IRS tax documentation.
Bartering is the trading of one product or service for another. Usually there is no exchange of cash. It is the most ancient form of commerce. Any business owner or professional who has a product or service to offer can barter.
While our ancestors may have exchanged eggs for corn, today you can barter computer services for auto repair. Another example of a one-on-one, non-barter exchange transaction is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of the goods and services exchanged must be reported as income by both parties.
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.
See Source: http://www.irs.gov/businesses/small/article/0,,id=187904,00.html
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. 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."
See Source: http://www.irs.gov/businesses/small/article/0,,id=188095,00.html
OK. That is it for my direct quotes from the tax code, but here is a very important note I have from my research. I am not a lawyer or a tax advisor and this is just my opinion here, but let's take a closer look at this and you can view the the associated IRS documentation.
For the purposes of bartering services with each other, the value of the services provided must be declared up front. Note the example in IRS publication 525 page 3 (linked below), which provides the babysitting example, it states "the income you receive must be declared." My interpretation of this is that if no value is received that there is no income.
See Source: http://www.irs.gov/pub/irs-pdf/p525.pdf
I think they are saying that if you don't pay the babysitter, you don't have to claim income for the services received. But most of us have heard horror stories about the IRS, and although this makes total sense, you never know for sure. For example, if at some point you tell a babysitter that works for free that she is saving you $20k per year, this may come back to haunt you if the IRS gets wind of it!
Although there are examples of barter in IRS publication 525 that show taxable income, to me it keeps coming back to the value of services provided stated when you initiate a barter - if a value is declared, taxes are due.
Here's a more likely example from my notes:
My understanding is that if you claim $50 per hour as the value of your services, and you trade with someone that claims $25 per hour, a comparable barter is two hours for one hour and you are both liable for filing taxes based on the value received, even though no money has actually been exchanged.
Imagine two people living 100% on barter - where will they get the money to pay taxes?
I have designed a project management system that provides the ability to track bartered time on projects. It is up to the individuals to negotiate the trade in terms of hours for hours and each transaction and the default value of each hour is zero. This is a private negotiation so no one else sees it. The only information available to the public is the level of satisfaction each has with the other person and an optional progress display for the project.
The system was designed out of a need to properly manage volunteers for projects. Projects are usually managed by one person with one or more volunteers. The system offers a task based scheduling system and an hourly credits manager so that even though the system is based on a one-to-one relationship for each transaction, a manager can track all of the tasks and associated transactions. We have found that people are motivated to participate in volunteer programs if they can easily see that the project is moving forward!
Here's one of the considerations I ran into. If the system facilitates barter transactions of real value (like most alternative monetary or credit systems out there now), the owner of the system is required to send a 1099-B each year to people that bartered (received) real value. Can you imagine the cost of sending out 1,000,000 tax forms each year for a system that has that many active users?
Part of what I do as an information architect is examine issues like these and save businesses from shooting themselves in the foot, so to speak. So, the design is done. If the organization that hired me to design this system actually comes up with the funds to build it, I will spread the word - I think it is a great idea!
In the mean time, I hope you have learned a little something about barter here and the potential for tax liability. The key is to set a value received prior to barter, and report that amount. If you receive no value, no filing is necessary. And if you get $10 in value for something that you paid $100 for, you may actually turn that barter into a tax deduction on your Schedule D!
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