Does the IRS Treat Barter as Taxable or Nontaxable Income?
The IRS states that you must declare revenue from bartering in the year the bartering takes place and pay the corresponding taxes. Depending on the details of the bartering, you may have to pay income or capital gains tax. When bartering takes place between individuals, both sides must declare a fair market value for tax purposes. When bartering takes place through an exchange, the exchange must issue documentation informing participants of their tax liability. No matter how you structure your bartering, the IRS expects you to declare an amount corresponding to the barter as revenue.
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Definition
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Bartering is an exchange of products or services without the use of cash. Individuals may exchange products they own or services that they offer and structure the trade so that the items exchanged are of approximately equal value. Barter exchanges may allow people to list their products or services and issue credits for items bartered away. In both cases the IRS expects participants to treat the barter as equivalent to a sale, declare the fair market value of the resulting benefit as revenue and pay all corresponding taxes.
Informal Bartering
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When individuals exchange property they own without transferring any cash, they incur a tax liability equal to the tax on the fair market value of the property they receive. Similarly, if they receive services in exchange, they must pay tax on the fair market value of the services. For example, if a plumber does repairs for a dentist who, in return, fixes his teeth, the plumber must pay tax on the value of the dental work while the dentist must declare the value of the plumbing work and pay the corresponding taxes.
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Barter Exchanges
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Barter carried out within structured barter exchanges also incurs tax liabilities, but participants do not have to declare transaction. Instead, the barter exchange keeps records of all transactions including any credits it issues for bartered items. By February 15 of the year following the year in which barter transactions took place, the exchange will mail barterers Form 1099-B, called "Proceeds from Broker and Barter Exchange Transactions." This form or an equivalent report details the annual revenue each exchange participant must declare due to their barter transactions.
Taxes Payable
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While the IRS insists that fair market value of benefits from bartering be declared for tax purposes, the actual taxes due may vary widely. When barterers trade ordinary consumer items or services, they must declare corresponding revenue as income. When they exchange items that rise in value, such as works of art or jewelry, they may have to declare the corresponding revenue as capital gains. If a barterer engages in barter as a trade or business, he will be able to deduct expenses incurred to generate the barter income. The main problem with barter is that you have to pay out money in taxes without having received any cash income.
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