Barter and Taxation explained

The barter system is alive and well in this depressed economy. Even though bartering has been around since the beginning of humanity, Congress has decided it is a taxable event and has instructed the IRS to find the bartering taxpayers and make them pay a tax on the trades. When anyone trades goods or services for other goods or services it is barter.

The issue is whether or not it is a tax-related event that must be shown on the tax return. When I trade the preparation of a tax return for any service or goods, it is taxable income to me. The other person only has to show the equal value of the trade as income to them if they are in a business. If I receive dental work in trade, then the dentist must show the same value as income. If I trade tax return prep for apples and squash and the person I traded with is not a farmer, then that person does not show the barter as income while I do. I show the income and they get to write off the tax prep trade value on next year's tax return as an expense.

If the trade was with a farmer who files a farming tax return, then that person must show the trade as income. I show the income and they show the income. I get no tax write off for the food while the farmer gets to write off my fees. When my neighbor does my lawn and I give him a home-made apple pie fresh out of the oven there is no trade at all for either of us because he is not in the lawn care business and I am not a baker by trade. If I watch your children and you pay me with some car repairs and neither of us is in the daycare nor car repair business, then that is not a barter tax event.

There are various ways to look at the barter system. If you trade your non-business services for medical care, then the doctor shows the income and you can use the trade value on your itemized deductions form "A" as a medical expense. When you give away your unwanted clothes to the Goodwill, you get a tax deduction. You traded goods for a value. That is not a form of barter. The Goodwill store shows the value of your donation as income and reports that to the IRS each year. You get a tax deduction.

What the IRS is looking for in an audit is where a business does trades and does not show the income on the tax return. They are also looking for people who do a lot of trades and show nothing on their tax returns. I will stop here. I could go on for pages. This is a complicated area of tax law. Please enter any comments or questions below. You can also use the comments sections to ask me questions which I will either answer on this page or start another page with your question as the new topic of the day. Have a great day.


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Comment by Patriot Eagle on July 18, 2011 at 8:54pm
USAMomma Val, no worries, if you are just doing trades as friends and neighbors with none of you in a professional trade, there is little to be concerned with.  If you are doing many trades and this is reducing your cost of living and you get audited and they ask how you paid your bills and you say barter, they will make you add the barter values to your income and make pay taxes on the trade values.  Thus, the occasional barter with a cake for babysitting is not an issue.  The more you barter, the more likely the feds will find a way to get a piece of the action.  The country is broke and barter is becoming a target to the tax collector.
Comment by Patriot Eagle on November 25, 2010 at 6:23am
Bob, you and I have now gotten the ball rolling on this. For all who are reading this post, Bob has a tax levy on his social security check due to a 2005 IRS issue. He got that removed yesterday after we spoke and worked out a strategy. Next, we are working with the IRS to remove the 2005 tax debt. This will take about three months. His January SS check will not have money taken from it but his Nov check will have a lot of $ removed, enough that he will not have enough money to buy groceries. He has not been home in a year due to medical issues and the IRS mail never got to him. I am in steady contact with him.
Comment by Bob Drummond on November 23, 2010 at 7:48pm
I just posted a letter and some people to;d me to contact you for possible help. Any help or sugestioms would be of great valje. I could phone and talk to you if that were nessecary. Thanl You BOB
Comment by Patriot Eagle on October 18, 2010 at 4:16pm
Hugh, the value of the dollar is an issue only if you have to pay taxes. It is possible to offset barter income with operating expenses, snuffing out the taxes completely. (Then again, if you are a single parent with a bunch of kids and low income, the IRS will gladly send you money.) The barter system is possibly one of the most frustrating areas for the IRS since it is hard to grab onto. It is quite complicated also. You could actually have barter income and barter expenses that equal each other. Hmmm.
Comment by Hugh Akston on October 18, 2010 at 2:19pm
I see. So when all Money(Cash dollars) loses value and everyone is working on a barter system, do I pay my taxes in a bushel of apples or ten hours on a chain gang?

God Save the republic.
Comment by Patriot Eagle on October 18, 2010 at 11:30am
Hugh, both show full barter value as income because you are offering your services. Anything that is labor related is taxable income even if it is not tied to your particular trade. Dry wallers who do roofing, the same, painters who does power washing, the same. The problem (issue) here is that the IRS wants all forms of labor taxed even if it is odd jobs such as moving furniture or running stuff to the dump. They are pushing as hard, as far and as fast at they can.
Comment by Hugh Akston on October 18, 2010 at 8:36am
So ... If I am a drywaller and I do roofing for a painter; that in return pressure washes my deck. Do we have to report that? It is similar to our main professions, but not a required skill set for either of us?

Just trying to understand where the line is drawn.
Comment by Patriot Eagle on October 16, 2010 at 5:29pm
Goober, what they look for is anything that could possibly be business related and thus is taxable income. What they are not looking for are the every day neighborly things like watching your kids in exchange for a couple of apple pies. Lawn work in trade for helping you take a truck of stuff to the dump. A mess of tomatoes for your dried basil.
Comment by Goober on October 16, 2010 at 3:38pm
So in other words they will find a way to attach what you are doing to your profession. Figures LOL
Comment by Patriot Eagle on October 16, 2010 at 6:22am
Goober, excellent example. Since you were in the business of bookkeeping, you need to show the income AND since the person you traded with did occasional labor, he must also show the income because laborer is a profession according to the IRS. How about them beans.
Comment by Goober on October 16, 2010 at 5:22am
Very good information. So, as a accounting type person, even though I am not working anymore in the field, if I were to say help someone in the auto repair bus. with their bookeeping in return for them helping me around the farm with manual labor (just an example) then I would have to consider that income but he would not?

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