These days, websites like www.craigslist.org and many others allow people to connect with others in order to buy, sell, or trade goods and services. Websites like these allow people from different parts of cities, states, or even the country. Some of these websites even allow people to swap or trade items or services for other items or services, which is generally known as bartering or trading.
But what does not occur to most people of the bartering world is that bartering, even though no money has actually exchanged hands, can still be taxable.
Bartering is an exchange of property or services and must be reported by a taxpayer, at the time received, at the fair market value of the property or services received. Generally, income from bartering must be federally reported on Schedule C or Schedule C-EZ of Form 1040. Also, if a taxpayer exchanged property or services through a barter exchange, the taxpayer should complete Form 1099-B or a similar statement showing the value of cash, property, services, credits, or scrip that the taxpayer received during the tax year.
If the concept of taxable bartering still does not make any sense, here is a few examples to help illustrate the point:
Example #1 – You are a self-employed attorney who performs legal services for a client who is a small corporation. For payment of your services, the corporation gives you shares of its stock. You must include the fair market value of the shares in your income in the year that you receive them.
Example #2 – You are self-employed and a member of a barter club. The barter club uses credit units as a means of exchange. It adds credit units to your account for goods or services you provide to members, which can be used to purchase goods or services offered by other members of the barter club. You must include in your income the value of the credit units that are added to your account even though you may not actually receive goods or services from other members until a later tax year.
Example #3 – You own a small apartment building and in return for 6 months of free rent, an artist gives you a work of art she created. You must report as rental income on Schedule E of Form 1040 the fair market value of the artwork and the artist must report the income on Schedule C of Form 1040 the fair rental value of the apartment.