Bartering is the trading of one product or service for another. Usually there is
no exchange of cash. 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.
Bartering is the most ancient form of commerce. 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.
Here are a few things you should know about bartering:
Barter Exchange
A barter exchange functions primarily as the organizer of a marketplace
where members buy and sell products and services among themselves. Whether
this activity operates out of a physical office or is internet based, a
barter exchange is generally required to issue Form 1099-B, Proceeds from
Broker and Barter Exchange Transactions, annually to their clients or
members and to the IRS.
Barter Income 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.
Taxes Income from bartering is taxable in the year it is performed. You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.
Reporting
The rules for reporting barter transactions may vary depending on which form
of bartering takes place. Generally, you report this type of business income
on Form 1040, Schedule C Profit or Loss from Business, or other business
returns such as Form 1065 for Partnerships, Form 1120 for Corporations, or
Form 1120-S for Small Business Corporations.
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