The Taxation Of Bartering

By James Harvey Stout (deceased). This material is now in the public domain. The complete collection of Mr. Stout's writing is now at >



Jump to the following topics:

  1. There are many things to consider in the taxation of bartering in the United States.
  2. Some barter deals are tax-free or tax-deferred.
  3. The IRS knows that some "barter income" is not reported.  

When I wrote this material in 1982, for the first edition of the book, the chapter contained 19 pages of detailed information. Since that time, the tax laws have changed considerably. Instead of rewriting the chapter with that same amount of detail, I am presenting only the basic concepts, because:

  1. Tax laws will continue to change, such that any details in this book would become obsolete very soon. (The quotes from IRS manuals are from the early 1980s.)
  2. Tax advice should be given on an individual basis, depending upon our particular circumstances.
  3. This book is being distributed on the internet, to an international audience, so the information would not apply to the non-US readers anyway.

There are many things to consider in the taxation of bartering in the United States.

  1. Both parties must pay taxes in a one-to-one barter deal, e.g., when an electrician swaps services with a house-painter. An IRS manual says: "The non-cash transactions give rise to taxable income for both parties of the exchange, regardless of whether the exchange is made directly or through a bartering club."
  2. Fair market value. The concept of "fair market value" is widely used when barter transactions are being taxed. The IRS says: "Fair market value is defined as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts. Fair market value may not be determined by a forced sale price, nor by the sale price of the item in a market other than that in which that item is most commonly sold to the public, taking into account the location of the item wherever appropriate. Thus, in the case of an item that is generally sold at retail, the fair market value is the price at which the item or a comparable item would be sold." We can consider these other details:
    • In trades between private parties, we can refer to general standards of value. For example, if we are trading a car, the fair market value might be the Blue Book price.
    • We must consider the retail value, not the wholesale value. The IRS gives an example: "An automobile generally is retailed so its fair market value would be its retail value. The price a used car dealer would pay may not be used. If tangible personal property is sold as the result of an advertisement in the classified section of a newspaper, and the property is of a type often sold by such means, or the property is sold at a public auction, the selling price will be presumed to be the retail sales price of the item at the time of the sale."
    • We have some leeway in determining this fair market value. For example, one typist might be charging $2 per page, while another is charging $3 per page. For tax purposes, we can consider the lower price to be the fair market value.
  3. A barter-club unit is generally valued at $1 each, for tax purposes (according to the IRS in January, 1980). However, a unit is really just a unit of accounting; in some cases, it is not worth $1 -- particularly if the club is experiencing inflation (such that 1000 units might be able to buy only $700 worth of goods or services), or if the club has decided to create units which are worth a different amount, e.g., 25 cents each. An IRS "Tax Law Observation" acknowledges the discrepancy: "There may be a problem valuing the 'credits.' Rarely will they be worth face value measured by what they can be sold for between a willing buyer and a willing seller."
  4. Barter clubs have various policies regarding the tax commitments of their members:
    • The clubs might give general advice on the subject. But, for detailed consultations, members would have to talk to an accountant or another expert. (These experts might be members of the club, so they could be paid with barter-club units.)
    • The clubs might encourage members to report their barter-income, but they do not compel them to do so. The matter is between the taxpayers and the IRS; the clubs generally do not get involved. (One barter-club president said bluntly, "I don't want to know.")
  5. Barter-club units can be counted for tax deductions. For example, if a carpenter "pays" his $200 medical bill by building cabinets in the doctor's office, then each may claim a deduction; the carpenter calls it a medical expense, and the doctor calls it maintenance of the business property. IRS ruling 80-52 said this: "If a commission paid to the barter club by a member purchaser was paid to acquire an item for use in connection with the member purchaser's trade or business, the amount of the commission is deductible as a business expense under Section 162 of the Code, provided the item received in the barter transaction meets the requirements of that section. If the commission was paid to acquire a capital item, the amount of the commission must be capitalized pursuant to section 269. If the commission was paid to acquire an item for personal purposes, the amount of the commission is not deductible, pursuant to section 262." Other deductions might include our barter-club expenses (e.g., membership fees, annual dues, transaction fees, etc.), and donations to a non-profit organization (e.g., a donation of barter-club units, or of items which we acquired by bartering).

Some barter deals are tax-free or tax-deferred.

  1. Gift exchanges. In a gift exchange, I am giving you (for example) a bracelet because you are my friend, and you are giving me your lawnmower as a kind gesture. The difference between a gift and a barter deal is the intent: when we give a gift, we do not intend to receive anything directly in return -- but in a barter deal, our supposed "gift" is actually half of a commercial transaction. The Supreme Court has defined the word: "A gift in the statutory sense proceeds from a detached and disinterested generosity out of affection, respect, admiration, charity, or like impulses." Tom Glynn, assistant to the IRS Commissioner in Washington, has said that the IRS doesn't tax "neighbors doing favors for each other"; he said that he would not expect us to report a favor in which we tend our friend's lawn and he paints our house in exchange. However, we need to be careful even with these neighborly swaps. Where do we draw the line? If we can trade a handful of lettuce as a gift without having to pay taxes, what about a bucket-full of lettuce, or 10 bushels of lettuce? In at least one case, the issue of "gift exchanges" has gone to the Supreme Court; in The Commissioner of Internal Revenue vs. Duberstein in the 1950s, a certain Duberstein failed to convince the Court that his exchanges were indeed gifts. After he gave his friend Berman some valuable business advice, Berman reciprocated with a gift of a Cadillac. Duberstein had not expected or requested the car, so he considered it to be a tax-free present, and therefore he did not report it on his 1951 tax forms. But the Court expressed a different view, saying that "despite the characterization of the transfer of the Cadillac by the parties and the absence of any obligation, even of a moral nature to make it, it was, at bottom, a recompense for Duberstein's past services, or an inducement for him to be of further service in the future."
  2. Like-kind exchanges. The goods are "of a like kind"; for example, we are trading real estate for real estate, or a tractor for another tractor. The IRS explains these tax-free exchanges in Section 1031 of the IRS Code: "No gain or loss shall be recognized if property held for productive use in trade or business or for investment (except stock or securities) is exchanged solely for property of a like kind to be held either for productive use in trade or business or investment." Some fine points:
    • This is a tax-deferred exchange, not a tax-free exchange. There is no tax on the item when we acquire it by bartering -- but if we ever sell it for cash, we will pay a tax.
    • We cannot create a tax-deferred exchange of personal property for property which is to be used for trade, business, or investment. "Like kind" refers to the way in which the property is used, not the type of property itself.
    • The IRS makes many distinctions in like-kind exchanges. For example, the IRS differentiates between Krugerrands and numismatic gold coins (like an old $20 gold piece).

The IRS knows that some "barter income" is not reported. Regional IRS Director Roland Wise said, "Bartering is certainly legal. It is the oldest way of doing business there is. Our concern is that barterers don't abuse, misuse, or break the law, and there is little doubt that bartering is a little more conducive to that opportunity." (Los Angeles Times. July 8, 1979.) The IRS's involvement includes the following actions:

  1. IRS examiners look for indications that we barter. Examiners have been instructed to look for deductions which are based on payments to barter clubs or barter brokers; these deductions might include membership fees, annual dues, service charges, etc.
  2. In 1982, the IRS examined a random sample of 1,800 members of barter clubs. Three-quarters of the members had not reported any of their barter income. The IRS collected an average of $1,600 in additional taxes from each of those people.
  3. In 1980, the IRS was investigating 100 barter clubs, according to Business Week.
  4. An IRS manual supplement (dated March 11, 1980) said, "... each District Director was asked to identify organized bartering exchanges in his/her district, and to secure the identities of participants and details of their barter transactions. ... The barter organizations should be asked for copies of the records of member transactions. These should be checked against members' returns (those which have been selected for examination under this project) for verification for the reporting income. During the initial interview, the member taxpayer should be asked the specific question, 'Are you a member of a barter organization or have you participated in any barter transactions?' The purpose of this question is to determine whether the taxpayer is a member of more than one barter organization or has participated in a direct (outside of an organization) type of barter transaction. If the response to this question is in the affirmative, copies of the monthly statements of transactions received from the barter exchange should be requested from the taxpayer. If the taxpayer refuses, consider issuing a summons to the barter exchange under the provisions of section 7 of this supplement." The U.S. District Court of Maryland has said that the IRS has the right to examine the list of members of a barter club.