What are the Tax Responsibilities of Bartering Participants?
If you engage in barter transactions you may have tax responsibilities. You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.
Barter dollars or trade dollars are identical to real dollars for tax reporting. If you conduct any direct barter – barter for another’s products or services – you will have to report the fair market value of the products or services you received on your tax return.
Reporting Bartering Proceeds
If you barter your products or services through a barter exchange, you should receive a Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The amount shown in 1099-B Box 3 Bartering is your barter transactions proceeds and is generally reportable as income and must be included on your tax return. Barter exchanges have an annual obligation to report your bartering proceeds to the IRS.
If a business makes payments of bartered services to another business (except a corporation) of $600 or more in the course of the year, these payments are reported on Form 1099-MISC.
For example, an attorney represents a painter for nonpayment of business debts in exchange for painting the attorney’s law offices. The amount reportable by each on Form 1099-MISC is the fair market value of his or her own services performed. However, if the attorney represents the painter in a divorce proceeding, then there are two types of expenses involved in this transaction, painting the office is a business expense for the attorney but the divorce expenses are personal expenses for the painter.The requirement to report barter payments only applies to payments made in the course of a trade or business, Therefore, the attorney must report on Form 1099-MISC the value of the painting services because painting the law office is an activity that is related to the attorney’s trade or business. But the painter need not send a Form 1099-MISC to the attorney reporting the value of painting the law offices, because the work is in exchange for divorce legal services that are personal expenses and separate from the painter’s business. See Form 1099-MISC Instructions for more information. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business (PDF), or other business returns such as Form 1065 for Partnerships (PDF), Form 1120 for Corporations (PDF), or Form 1120-S for Small Business Corporations (PDF).
Nevertheless, even if no Forms 1099-B or 1099-MISC are filed, bartering is generally taxable to the extent of the fair market value of the products or services bartered under Internal Revenue Code Section 61. In the case of the example above, the painter would still have a taxable transaction in the bartering of painting for legal work by the attorney on the divorce proceedings even though no Form 1099-MISC is required to be filed by the attorney. Please refer to Publication 525, Taxable and Nontaxable Income, and Internal Revenue Code Section 61 for more information.
Staying in Compliance
Treat barter income as you would any other business activity. Keep good records, work with a reputable barter exchange and consult the IRS or a tax professional if you have questions.
If you have failed to report this income, correct your return by filing an amended return such as Form 1040X (PDF). Refer to Topic 308 for Amended Return information. If you receive income from bartering, you may be required to make estimated tax payments.