There are a couple recurring concepts that I’ve run into about barter that I’d like to address. For those of you that have been around the block, you already know these. That being said, I hope this article will still be valuable as you can refer the uninitiated to it.
- Barter is NOT a tax dodge
The IRS does not mind if you barter at all. That’s because all of your barter income is taxable. You are expected to report all barter sales on your income taxes. This on is a slam dunk as far as documentation goes. Here is a direct quote from the irs.gov website:
Topic 420 – Bartering Income
Bartering occurs when you exchange goods or services without exchanging money. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of goods and services received in exchange for goods or services you provide must be included in income in the year received.
Generally, you report this income on Form 1040, Schedule C , Profit or Loss from Business. If you failed to report this income, correct your return by filing a Form 1040X. Refer to Topic 308 for Amended Return information.
- Barter is not illegal
It may surprise you to hear that some folks out there actually think that bartering is illegal. Usually this idea in some way is related to taxation. I guess the belief is that some government agency has banned barter as a way to stop folks from skipping out on their taxes. This is totally untrue. Barter for any legal product or service that I’m aware of is totally legal. What IS illegal is tax evasion.
It’s not just income tax that can be an issue. I once ran into a small farmer that I wanted to trade with that was convinced barter was illegal. After asking some questions I figured out what the actual problem was. Some years back they had traded produce for labor on their farm. When this worker became unhappy with them they got into a lot of trouble for illegal labor practices. The farmer failed to understand that the problem was not barter. The problem was that this person was an employee, but they failed to follow local labor laws for this person. It is perfectly legal to hire an employee and pay their net pay on barter, but you still have to pay state and local taxes and withholding in cash as well as have worker’s comp insurance ect. etc.
I also find it interesting that even seasoned barter professionals often hold unfounded beliefs that certain industries are banned from barter. I’ve been told by veteran barter professionals that industries like insurance, investment brokerages, and firearms sales all have special rules that limit or ban barter . The problem is that every time I dig into the topic I can never find one shred of evidence either in statute or common law prohibiting or limiting barter in specific industries. Of course I should point out that I’m not an attorney. Please post back if you are an attorney and have some new information for our readers on this topic!
It’s important to understand these issues because part of your job as a good trader is to recruit new trading partners. As you do that you will without a doubt run into the above objections and you need to be ready to answer them. Of course now you can also give them a link to this article!