Bartering income is the value of goods or services received in exchange for goods or services you provide. The value of the property or services received is treated like cash and is subject to tax. An example of bartered services would be rent reduction in exchange for repairs or improvements to the rental property performed by a tenant. Bartering is often done to mitigate a cash flow shortage or generate additional business through popular bartering marketplaces.
Calculating Bartering Income
Direct Exchanges
In a direct exchange, two taxpayers directly exchange goods or services of equal value. Determination of the income is straightforward in an arrangement made directly and is determined by the FMVFMV is the price for which a product or service would be attained in the general marketplace of the property or services received.
Bartering Marketplace
There are two commonly used kinds of bartering marketplaces.
The first type of marketplace is a formal network for parties interested in bartering to connect with each other and engage in a direct exchange. As with other direct exchanges, this bartering transaction is valued at the FMV of the goods or services you receive.
The second type of marketplace supports bartering transactions by using pseudo-currency as a substitute for cash. In this setup, a participant can sell their goods or services for the marketplace’s currency and then later use that currency to purchase goods or services from another participant. Each participant’s bartering income is recognized as the value of the pseudo-currency at the time it is receivedBartering marketplaces that utilize internal currency may require a fee assessed per transaction as well as membership fees. These fees are expenses of the transaction and can be used to offset bartering income. . The key is that participants aren’t allowed to wait until they receive actual goods or services—they must report income immediately upon receiving the pseudo-currency.
Reporting Bartering Income
Bartering transactions create an activity that may need to be reported to the IRS on both income tax returns and informational returns.
Income Tax Reporting for Bartering Transactions
Barter transactions that take place in the course of a trade or business are reported in the same way that you would report cash transactions. Income is reported on the business return as follows:
- Sole proprietorships/single-member limited liability companies (LLCs): Schedule C
- Partnerships/multimember LLCs: IRS Form 1065
- S corporation (S-corp): IRS Form 1120S
There also might be a deduction that can offset that income. For example, a lawyer drew up a contract for a certified public accountant (CPA) in exchange for tax services provided by the CPA. The CPA would recognize income from the tax services and deduct an equal amount of expense for legal services. The activity would be recorded in this manner, although no cash changed hands.
1099 Informational Returns for Bartering Transactions
Businesses receiving services in excess of $600 from an individual or partnership must report that income to the IRS on Form 1099-MISC. This is true whether the business pays for the services with cash or in a bartering transaction. The 1099-MISC requirement is only for the payment of services, not for the purchases of goods. You can learn more in our article on IRS Form 1099 Reporting.
For transactions within a bartering marketplace, the marketplace will fulfill the reporting requirements by issuing a 1099-B for participants who received payments for goods or services in the marketplace’s pseudo-currency. Therefore, participants don’t need to issue Form 1099-MISC for any transactions within the marketplace.
Bartering Income Examples
A landlord rents out an apartment for $800 per month. The landlord offers one month’s free rent to a tenant in exchange for plumbing and electrical work that the tenant will perform. The landlord should issue a Form 1099-MISC to the tenant for the services since the value is over $600.
Landlord’s Schedule E:
- Gross receipts: $800
- Repairs expense: $800
- Net effect to Schedule E: $0
Tenant’s Form 1040 (Other Income):
- Gross receipts: $800
If the tenant is conducting this service in the course of a trade or business, this income would be reported on Schedule C and subject to self-employment income. The tenant may also deduct the cost of any plumbing or electrical supplies used to make the repairs.
A self-employed lawyer enlists a graphic designer to create a visual concept for their website in exchange for legal services. The value of the graphic design services is $1,500 and is exchanged for $1,500 in legal services that the graphic designer uses for business purposes. Since both the lawyer and the graphic artist received over $600 in services, they must both file a Form 1099-MISC reporting the income to the other party.
The reportable transactions would be as follows:
Lawyer’s Schedule C:
- Gross bartering income: $1,500
- Graphic design services expense: $1,500
- Net effect to Schedule C: None
Graphic Designer’s Schedule C:
- Gross bartering income: $1,500
- Legal fees: $1,500 (only if the legal services were used for business purposes)
- Net effect to Schedule C: None
Note that if the graphic designer used the legal services received for something personal, like the preparation of a will, then they couldn’t deduct it on Schedule C. The result would be a $1,500 increase in net business income on Schedule C.
The same self-employed lawyer receives an antique vase from a friend in exchange for $1,500 in legal services. The friend originally purchased the vase for $300 many years ago. Since the lawyer received a vase, not a service, they do not need to file Form 1099-Misc.
The reportable income tax would be as follows:
Lawyer’s Schedule C:
- Gross bartering income: $1,500 (value of the vase)
- Net effect to Schedule C: +$1,500
The lawyer will have a $1,500 basis in the antique vase that will be used to calculate any gain or loss if the antique vase is eventually sold.
Friend’s Form Schedule D:
- Long-term capital gain: $1,500 – $300 = $1,200
- Net effect to Schedule D: +$1,200
The friend will treat the sale of the vase the same as if they sold it for cash. So, it gets reported on Schedule D as the sale of a capital asset. If the legal fees were used for a deductible purpose, they could also receive a deduction for that amount.
A self-employed CPA is a member of a bartering marketplace. In April, they prepare a tax return for a member of the marketplace for $1,000 in the pseudo-currency. In June, they spend $500 of their pseudo-currency on marketing materials for their company and $500 for tickets to the opera. Here is how the April and June transactions are reflected on Schedule C:
- Gross income: $1,000
- Marketing expense: $500
The $500 of pseudo-currency spent on opera tickets is a nondeductible personal expense.If an exchange is not related to a trade or business, the income from the exchange would be reported on the “other income” line of the personal tax return. An example of this kind of transaction would be a personal painting exchanged for personal car repair.
Additional Taxes From Bartering Transactions
Income tax is assessed on the FMV of what was received as though it was cash, even though no dollars exchanged hands. In addition to income tax, the following taxes could also be assessed:
- Self-employment tax: If the goods or services you provided are part of a trade or business, the bartering income must be reported on Schedule C as business income. Business income greater than $400 may incur self-employment tax. For more information on calculating this tax, reference our guide to self-employment tax.
- Employment taxes: If the party that received your bartered goods qualifies as your employee, you may need to withhold employment taxes in the same way that you would for cash paid to an employee.
- Excise tax: Federal and state governments may impose specific taxes on the sale of certain goods and services. Excise tax could be imposed on a bartering transaction if the exchange includes something on which a jurisdiction imposes an excise tax, such as gasoline and cigarettes.
State Taxation
Most states levy sales and income tax on barter transactions as if they were transactions engaged in for cash. More than half of the states calculate their income tax by starting with federal-adjusted gross income and adjusting for state allowances.
Since bartering income is included in federal income, bartering income would be taxable to those states—unless a specific exception is included in state law. Sales tax would apply for items exchanged in a barter transaction in the same way that cash transactions would be taxed.
Bartering vs Noncommercial Trade of Services
Not every exchange of goods and services needs to be reported to the IRS. Bartering does not include casual, noncommercial swaps, such as babysitting or carpooling. If a group of parents takes turns driving the neighborhood children to school, that arrangement does not constitute bartering for tax purposes.
Now let’s assume that one neighbor is an electrician and the other is a math tutor. If the math tutor provides tutoring services to the electrician’s child in exchange for lighting installation, this arrangement does constitute bartering—and both parties are expected to include the value of the services provided in their income tax filing.
Frequently Asked Questions (FAQs)
The exchange of goods or services for something other than cash generally results in bartering income equal to the price of what those goods or services would be purchased for on the open market.
Yes, bartering is legal in the US but is subject to income tax the same as cash transactions.
Form 1099-B is issued when the barter transaction is done through an official barter exchange. An official barter exchange is a formal marketplace where providers of goods and services can connect and swap services. Some exchanges require the use of their own internal currency to conduct transactions.
Bottom Line
Bartering is often used when people are short on cash. Even though bartering is a taxable transaction, deductions are available to reduce that income if the good or service you received is used for a deductible purpose. Taxpayers should also be mindful of other taxes that may be incurred through bartering, including the imposition of state taxes.
