Bartering is a great way to get something when you don't have the cash.
Take your toothache. In exchange for painting your dentist's office, she took a look at your pearly whites.
Your dentist got a new workplace look. You got that painful tooth filled. Everyone's happy.
Even better, since there was no money involved, neither of you has to worry about taxes, right?
Wrong.
Any time you exchange services or products for other services or products, you've participated in a barter transaction.
And, as this Daily Tax Tip notes, in the eyes of the Internal Revenue Service, both you and your dentist essentially earned taxable income, just not in the traditional monetary exchange way.
Rather, you've earned the fair market value of the goods or
services you received. And that amount must be included as income on your tax return.
So how much exactly do you put on your 1040? The general definition of fair market value is the price a willing, knowledgeable buyer would pay a willing, knowledgeable seller.
Basically, the IRS says don't try to low-ball the price of a product or service just because it's being exchanged instead of purchased with cash.
More structured bartering: A lot of bartering is one-to-one. Some folks, however, choose to make their services or products available through a barter exchange. The IRS defines this as any person or organization with members or
clients that contract with each other to
jointly trade or barter property or services.
When a barter
exchange member sells a product or a service to another member, the seller's barter account is credited for the fair market value of the sale. Similarly, when a barter exchange member buys, the account is debited for the fair market value of the purchase.
Barter exchanges have their own unit of exchange, usually known as barter or trade dollars, valued in U.S. currency. The exchange acts as the bookkeeper for keeping track of
trade dollars that participants accumulate.
The barter exchange also is required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to
their clients or members.
Remember, a copy of this third-party reporting document also goes to the IRS.
Also remember that even if you don't get an official tax statement of your amount of barter income, legally you still must report it.
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