When you engage in bartering, you are trading one product or service for another, and there is usually no cash exchanged. Small businesses sometimes barter to get products or services they need. What you might not know is that the IRS considers the value of products or services received from bartering to be taxable income.
The IRS lists four things you should know about bartering goods and services:
- There are tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Know that you may owe income taxes, self-employment taxes, employment taxes or excise taxes on your bartering income.
- Know barter exchange rules. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate from a physical office and others have an online operation. Be aware that all barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must submit a copy of this form to its bartering members and file a copy with the IRS.
- Bartering income must be reported. Barter and trade dollars are considered to be the same as real dollars for tax purposes. Consequently, you must report this on your tax return. Both people involved in the barter must report he fair market value of the product or service as income.
- Familiarize yourself with reporting rules. The way in which you report bartering on a tax return depends on the situation. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.
If you’re looking for more information, consult the Bartering Tax Center on IRS.gov.