International Revenue Service, US Department of the Treasuries:

Barter and Taxes

As with any discussion about taxes, it is always prudent to start by stating what you don’t know. I am not a tax expert and have no special expertise in the taxation of barter transactions. So please do not read this blog and accept it as advice. Rather, on a subject where there appears to be significant confusion, I am attempting to communicate my general understanding of the tax implications of bartering and seeking to initiate a dialogue.

First, it can be unequivocally stated that under the U.S. tax law there are tax implications when you trade. There may be reporting requirements and a completed trade can give rise to tax liabilities. This being said, the tax liabilities attendant to bartering will vary and can be less onerous than for a “buy and sell” transaction depending on a number of factors, including where you are resident and the types of items that are traded (goods, services, or real estate). In short, there may be real tax advantages to bartering.

Reporting requirements can apply both to the trading partners and to the trading platform (BarterQuest) that facilitates an electronic trade. While there are existing regulations, my common sense leads me to believe that the “rules of engagement” will be further refined as electronic barter matures. An analogy is eBay, where a ruling was issued only recently by the U.S. tax authorities that clarified which auction transactions require reporting by eBay. My interpretation is that, in essence, reporting by eBay was limited by the ruling to more material transactions or to recurrent transactions that suggest that a seller is engaged in a business.

While tax liabilities are the theoretical consequence of bartering, in a model where there is always, by definition, a fair exchange and no money actually changes hands, there are practical difficulties related to the determination of cost basis and market value. Has anyone made a profit? Again, I believe that the “rules of engagement” will evolve.

We at BarterQuest would like to take this opportunity to call upon our industry and other interested groups to work together toward a greater rationalization of the tax laws for barter transactions. This effort has special importance with respect to the application of such laws to routine transactions between individual consumers. These barter transactions not only may be critical to people who are looking for ways to save money or do not have the money to otherwise get what they need, but, in the aggregate, constitute a “green” machine that can have a material impact on the preservation of our environment.