- Bartering involves trading goods or services with someone else
- People have been bartering for thousands of years, and it's very popular today
- Knowing the rules of the trade and the tax issues involved are the keys to successful bartering
People have been bartering for years. In fact, you've probably done it without even knowing it.
What It Is
Bartering is when you trade something else in exchange for something else. It's that simple. You can trade practically anything, whether its goods or services, or a combination of both. For example, you and another person may trade:
- A lawnmower for car tires
- Work on designing a web page for dental work
- A boat for legal services
No money changes hands in many bartering deals. After all, the whole idea is for you and the other person to get what you want or need without spending money. That doesn't mean money is never involved in a deal. That's up to you and the other person. For example, if the trade involves things that aren't equal or nearly equal in value, one side may offer to add a few dollars to his end of the deal.
People have been bartering for thousands of years. Cavemen traded food, fire, and tools. In the frontier days in the US, explorers and settlers traded animal skins, horses, and food. You've probably bartered, too. Remember trading a peanut butter and jelly sandwich for a bologna sandwich at school? Have you ever helped a friend move in exchange his two tickets to a baseball game?
Bartering has become more popular in the wake of the 2009-2010 economic crunch. It allows individuals and businesses to get what they need without busting their budgets. In fact, it helps lower costs low and save money.
You can find a place to barter easily, too. People advertise in the newspapers and there are "swap meets," which are a lot like flea markets or rummage sales. There even are dozens if not hundreds of bartering websites to help traders meet. Some let you trade for free, others charge a fee.
Society and people have changed from thousands or even hundreds of years ago, so bartering has become a bit more complicated.
The Deal: Is it a Contract?
Basically, yes. A barter transaction is a contract. Each party gives up something of value in exchange for something of value. What does it mean?
- If you make a deal on a trade, you generally have to keep it. If you don't, the other person could file a lawsuit against you
- The agreement may be in writing - a letter or email - or it may be oral or verbal, a simple in-person or telephone conversation. Except in very limited cases, an oral agreement is just as good as written one
- Ownership of the goods traded doesn't change until they're delivered to the other person. So, until you actually get the tires or computer, you can't sell or trade it, or do anything else an "owner" may do with his goods
- If one side gets goods or services but the other side doesn't hold up his end, the person on the short end may file a lawsuit for return of the goods or money for the value of the service. Depending on the value of the goods, the person may be charged with the crime of "conversion," or theft
Yes, just like many other things you do in the US, taxes are involved in bartering. There are no "tax free" trades. Whether you trade goods or services, you have to report the value of the goods or services receive as "income" on your federal and state tax returns. For most barter transactions for individuals, you simply add the value to your income. If your business traded goods or services, you report the trade on Form 1040, Schedule C.
If you used a "barter exchange," such as a bartering website, you should get a Form 1099-B to use when filing your tax return.
What To Do
Here are some things you can do to help make your bartering a smooth, profitable deal:
- Get the deal in writing. It's always good to write down exactly who's trading what and the values of the goods or services being traded
- If the deal involves goods or services worth a lot of money, $1,000 or more, you may want both parties to sign the agreement
- Don't agree to a deal without thinking it through. If a trade sounds too good to be true, it may be. The other side may not be telling you everything
- If you change your mind and want to back out of a deal, let the other person know as soon as possible. In most cases, if you explain why you want out of the deal and the other party hasn't done anything on his end yet, you can get out of barter deal without any problem
- Be honest and trustworthy and honor your deals. It's tempting, but don't cancel a deal simply because someone else offered you a better deal. If you barter through a website, you may lose credibility if you cancel deals a lot
- If you do cancel out of a deal, ask the other side to sign a short, simple letter stating the deal was cancelled
- Report your trading activities to the Internal Revenue Service (IRS)
Bartering can be a fun, easy way to save money to get something you want or need. If both sides do things right, everyone should walk away from the deal happy.
Questions for Your Attorney
- I think the items I got in trade are stolen. What should I do?
- What should I do if I didn't report bartering on my taxes last year?
- Can minors barter?
- How do I determine the value of the goods or services bartered for tax purposes?