The growth of the Internet, coupled with periodic economic downturns, has spurred continual growth in the barter industry — with tax consequences that are often overlooked by taxpayers engaging in barter transactions.
Although barter as a form of exchange is likely the original and oldest form of trade, it was not until the Tax Equity and Fiscal Responsibility Act, or TEFRA, in 1982 that the U.S. formalized the tax treatment of barter transactions and barter exchanges. Barter exchanges are third-party record-keepers for barter transactions. Under TEFRA, barter exchanges are required to report all member barter sales to the Internal Revenue Service.
“TEFRA gave legitimacy to barter as legal tender,” said John Strabley, president of IMS Barter, the largest barter exchange in North America. “It gave credibility to a fragmented industry. Exchanges sprouted up all over the country.”
“Barter conjures images of direct trading, but through the exchanges we are able to create a currency system which exchanges debits and credits,” he said. “For direct trading you need a coincidence of mutual need between each party, and that seldom happens. A professional barter organization is actually a financial services firm. Acting as a third party, it facilitates transactions between businesses by utilizing trade dollars, its monetary unit of currency. Companies aligned with a trade organization set prices — in trade dollars — for their products and services. Other members of the network pay in kind through a payment platform.”
Exchanges became the tax reporting vehicle for businesses doing a different type of commerce, he explained.
As business bottomed out as a result of COVID-19, the appeal of barter continued to increase, according to Strabley.
“During times of crisis, barter flourishes. It happened during the 2008 recession, and it’s happening now,“ he said. “The reason is simple: By trading their unused capacity or surplus products, stalled businesses generate another revenue source, reduce costs, and purchase necessities without spending cash. The downturn spawned by COVID has caused many businesses to pause activities like buying ad campaigns, printing new brochures, increasing health benefits and expanding office space.”
Barter acts as a stabilizing economic rudder in stormy times.
“Businesses are trying to conserve cash, create sales and rebuild their market share. A barter exchange is the platform that allows them to do that,” Strabley explained. “Our role is to sell unsold capacity to customers that typically would not be routine customers. The businesses that do best are those that have a perishable commodity like hotel space, empty dental chairs, theatres and golf courses. Time is a perishable commodity — once it passes, you’ll never be able to sell it again.”
In legitimizing barter transactions, TEFRA treats barter transactions as cash. At the end of the year, the IRS requires the trade organization to provide each member with a Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions.”
The IRS defines a barter exchange as an organization whose members contract with each other, or with the exchange, to exchange property or services. It doesn’t include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis, for example, a babysitting cooperative run by neighborhood parents.
Taxpayers include in their gross income the fair market value of goods or services received from bartering, whether transacted on a one-to-one basis or through an exchange. Those engaging in barter on a regular basis throughout the year may be required to make estimated tax payments.
