The most common mode of payments that is acceptable by many people is cash, credit payments, and checks. However, there are times when bartering is either the only or the most appropriate mode of payment. Bartering is when goods and services are exchanged for other services or goods. Bartering is legal and transactions that involve bartering are legally acceptable and binding. Bartered goods and services are treated the same way as accepting cash and have to be reported and taxed.
The fair market value of the goods and services you receive in exchange of those you provide must be included on gross income on your federal tax returns. Had such transactions been paid in cash, they would still be taxable and therefore, the tax still applies even in the absence of cash.
Any proceeds from bartering are subject to taxation the same year it is transacted and should be reported on a federal Form 1040, Schedule C-Profit or Loss from Business. This form is available for download from the IRS website. The taxable income from bartering can also be reported as “other income” on line 21 of the IRS Form 1040 if it is not part of a business transaction. Subject to some normal rules for determining estimated payments, you might be required to come up with an estimated payment if the income from bartering is taxable.
It is also important to note that typical regulations for business expenses still apply in bartering where you might still have to deduct the costs of the bartered goods and services from the income. Businesses that make payments of services that are bartered to other business except corporations (inclusive of partnerships and sole proprietorships) amounting to over $600 within a year should report these payments on federal Form 1099-MISC. However, barter transactions shouldn’t be reported on Form 1099-MISC abut on Form 1099-B, unless they meet some specific exceptions. Any payments reported on forms 1099 may be treated to a backup withholding and treated in the same fashion as cash payments.
The tax treatment is determined by the character of assets which can be reported as capital gains, depreciation recapture or ordinary gains if business assets are used in barter. Bartering appreciated assets like art, collectibles and antiques can also result in capital gains.
Occasional bartering is easier to report but regular ones appear to be more challenging. You should therefore ensure that relevant records are kept for easy filing of your returns. Note the dates, what was exchanged, parties involved and if possible, get and keep the receipts. This will make work easier for you when filing your tax returns.