Recording barter transactions
A transaction would be treated as a barter if there is an exchange of goods and services for other goods or services. Although bartering is a common transaction that occurs in many businesses, it is often reported incorrectly by the parties involved.
There are two types of barter transactions:
- Direct barter: Conducted when goods or services are directly exchanged. If this type of barter transaction occurs, then the fair market value of the goods or services received must be reported on a taxpayer’s tax return in the year that it was performed.
- Internet-based barter: Conducted in a marketplace where goods and services exchanged are valued through a barter exchange. The marketplace online will aid in the barter exchange between parties for a fee, and keep track of trade dollars if one party has a need or desire for goods or services from the other party involved in the barter transaction. If trade dollars are earned, then they are considered taxable income.
Bartering items would be reported on Schedule C, Profit or Loss from Business, for an individual, and on Form 1065, Form 1120, or Form 1120S for a business entity. If a barter is aided by a marketplace, then a Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, should be issued and subsequently reported on the individual or entity’s tax return.
Liabilities from the income received as a result of barter transactions could result in income taxes and/or self-employment taxes. Recordkeeping for a barter transaction is necessary in the event of an IRS audit, as well as to record the value of items exchanged, should a gain or loss be triggered.
Please contact your SS&G tax professional if you have any questions regarding current or potential barter transactions.