Is Bartering a Taxable Event?

Fair market value
Here are some examples of an exchange of services:

A computer consultant agrees to offer tech support to an advertising agency in exchange for free advertising.
An electrical contractor does repair work for a dentist in exchange for dental services.

In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there is contrary evidence.

In addition, if services are exchanged for property, income is realized. For example:

If a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory.
If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock.

Joining a club
Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year, and that each unit is redeemable for $2 in goods and services. In that year, you will have $5,000 of income. You will not pay additional tax if you redeem the units the next year, since you have already been taxed on that income.

If you join a barter club, you will be asked to provide your Social Security number or Employer Identification Number. You will also be asked to certify that you are not subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate.

Tax reporting
By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

Exchanging without exchanging money
By bartering, you can trade away excess inventory or provide services during slow times, all while hanging on to your cash. You may also find yourself bartering when a customer does not have the money on hand to complete a transaction. As long as you are aware of the federal and state tax consequences, these transactions can benefit all parties involved. Contact your Rudler, PSC advisor at 859-331-1717 if you need assistance or would like more information.