Identifying and Recording Income from Exchange Transactions: Locations and Methods
Swap 'em if you got 'em! That's the essence of a barter transaction—exchanging goods or services without a dime changing hands. But what about taxes? Well, buckle up, because the Internal Revenue Service (IRS) wants its cut, too.
Here's the lowdown on reporting your barter business for tax purposes.
TL;DR:
- Bartering is the exchange of goods and services between individuals and businesses instead of money.
- The IRS views bartered goods and services as taxable income and expects both parties to account for them.
- Businesses should account for the fair market value of goods and services received or provided through bartering.
- Individuals should report barter revenue on their IRS Form 1040, either Schedule C or Schedule E, depending on the circumstances.
- Be mindful of the fair market value when determining the taxable income from barter transactions.
Where's the Rubber Meeting the Road?
If you're a bartering enthusiast, whether a business or an individual, take note that the IRS wants its piece of the pie. They consider the goods and services exchanged through bartering as taxable income for all parties involved. The IRS publishes guidelines to help navigating this area, like its "Tax Guide for Small Business."
Snagging That Dough: Reporting Barter Revenue
Businesses
Business owners and companies involved in bartering should account for the fair market value of all goods and services they receive or provide through it. If a business provides bartered services to another, it should report these payments on Form 1099-MISC if they exceed $600 in a year. For bookkeeping purposes, a barter exchange account acts as an asset account, while barter revenues are treated as income items.
Individuals
Individuals may report barter revenue on their IRS Form 1040—either Schedule C: Profit or Loss From Business, or Schedule E: Supplemental Income and Loss, depending on the specifics of the transaction.
Bartering: Ancient Practice, Modern Tax Scrutiny
Bartering took on new life (and greater IRS scrutiny) with the advent of the Internet, making it much more accessible for individuals and businesses.
Swapping and Trading: The Difference
The IRS distinguishes between a trade of similar services between two parties on a non-commercial basis and the act of trading saleable goods/services. For example, neighbors babysitting each other's kids won't have to report that as income on their tax returns—unlike a plumber providing plumbing services to a dentist in return for dental work.
What's a Barter Exchange?
A barter exchange, sometimes called a barter club, is an organization where members exchange property or services with each other. Small business owners might trade goods/services directly with another member, or exchange them for credits that can be used with a different member. These credits are considered income for the year they are received and must be reported on Form 1099-B.
Bartering: Subject to Tax Withholding?
In general, barter transactions are not subject to income tax withholding. However, if you fail to provide your tax identification number (TIN) to a barter exchange or provide an incorrect one, you may be subject to backup withholding of 24%.
The Great State's Tax Statement
Many U.S. states also tax barter transactions as income and may impose sales taxes upon them.
Fair Market Value: Get it Right!
Determining the fair market value of goods/services exchanged isn't always easy, but it is typically based on the price they would normally sell for or have historically sold for. If both parties agree on the value of the services ahead of time, that value is accepted as the fair market value unless shown otherwise.
For capital gains/losses from bartered securities or property, use Form 8949 to detail each transaction before transferring totals to Schedule D.
The Final Word
No money may change hands in barter transactions, but value still prevails. The IRS views bartered goods and services as a form of income and expects both parties to report them accordingly. Keep those records straight, and pay particular attention to fair market values when determining the taxable income from barter transactions.
While Pepperstone doesn't deal with barter transactions, they've got you covered for your CFD and forex trading needs. Go ahead, dive in, and conquer the financial waves!
- The IRS considers goods and services exchanged through bartering as taxable income for all parties involved, requiring both to account for them.
- Businesses involved in bartering should report the fair market value of all goods and services provided or received, and if they provide bartered services to another exceeding $600 in a year, they should report these payments on Form 1099-MISC.
- Individuals may report barter revenue on their IRS Form 1040, either Schedule C or Schedule E, depending on the specifics of the transaction.
- The IRS differentiates between a trade of similar services between two parties on a non-commercial basis and the act of trading saleable goods/services, with the former not requiring reporting on tax returns while the latter does.
- A barter exchange, an organization where members exchange property or services with each other, requires that credits received from such exchanges be reported on Form 1099-B.
