Bartering and Taxes

While catching up on old news, I heard a story about bartering on the Marketplace Money podcast. It’s called a Time Bank. Basically you do something for someone else and earn some Time Dollars. Then you use your Time Dollars for services you want from another person. It’s an indirect bartering system because direct bartering requires a coincidence of wants. In other words if you are a plumber and you fix a car mechanic’s drain, but you need guitar lessons, not replacing the water pump in your car, you can’t barter directly with the car mechanic, unless the car mechanic also happens to teach how to play a guitar. Time Dollars serve as a medium of exchange.

Bartering is apparently hot these days. The popular web site Consumerist recently quoted an Associated Press article Short on cash? Bartering making a comeback which said traffic to bartering web sites doubled in this weak economy.

Boise beautician Heather Wood has traded haircuts and pedicures for years of day care, kids’ clothes, a paint job for her car, an oil change, a set of professional portraits for her family and dental cleaning.

“It’s fun, and it builds a whole different kind of a relationship,” said Wood, who has five children. “They’re getting what they want and I’m getting what I want. I would much rather do that than make cash most of the time.”

I also found this L.A. Times article from Google: Boom times for barter.

In this tough economy, Valerie Whitlock uses two forms of currency: money and barter. The 37-year-old actress and writer from Studio City holds down sporadic film and television gigs to cover her rent, utilities, car payments and insurance. For everything else — head shots and haircuts, clothing and cut reels — she trades her handcrafted jewelry.

What’s wrong with charging money for your haircuts and pedicures or handcrafted jewelry? Whatever you can do with bartering, you can do with money. If it’s an equal exchange, everybody is even after giving and receiving money. You give a pedicure for $50 and you pay $50 for day care. It has the same effect as bartering. But you can’t do everything with bartering that you can do with money. You can’t walk up to a gas station and offer haircuts for gas. So why go through the trouble with bartering?

I can’t help wondering if it has something to do with taxes. I don’t want to accuse beautician Heather Wood or jewelry maker Valerie Whitlock in those articles of anything because I have no evidence whatsoever whether taxes are a consideration. When you receive money for your products or services, you have to pay taxes. If you are self-employed, you have to pay income tax and both the employer’s and the employee’s shares of the payroll tax (15.3%). When you use the money received to buy stuff, you may have to pay sales tax. If the person on the other side of the trade is also self-employed, the other person will have to pay the same set of taxes too. If you do bartering, you are supposed to pay taxes the same way as when you charge money. The IRS says you have to record income for the fair market value of the bartered goods or services you receive. But it’s a lot harder or perhaps impossible to track, because there is no money changing hands in bartering. There is opportunity to either not report them or report them at a much lower value. After all, the fair values of the bartered goods and services received in return are difficult to assess. Who says that paint job for your car has to be worth $600, not $200? The guy just gave you a good deal, you know?

The IRS must not be amused about all these bartering going on. They produced a video about bartering, telling people they must report their bartering income. Good luck with that.

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Comments

  1. says

    Sorry to say it but there is no way the govt can come after you for bartering. I help my brother move and he buys me dinner, the IRS will not know. But by doing it at the time bank you do open the doors for tax implications. I’d love to see this trend continue just to see how an industry develops around it.

  2. says

    Just to be clear, the IRS says casual bartering is not taxable. But if you do it as a business — like the jewelry maker in the quoted article, making and selling jewelry is her business — then it’s supposed to be taxed whether you receive money, or goods and services in return.

  3. simplesimon says

    How do you tax the exchange of goods?

    *Tax Filing Day*
    “Oh man, the IRS says I owe 3 necklaces and 2 sets of earrings.”

    =)

    When I was in China, most restaurants I went to didn’t give receipts so that the government can’t keep track of transactions. The Chinese government is trying to encourage customers to ask for receipts by implementing little “scratchers” on receipt paper so customers can win something (usually money). I don’t know how it works in retail stores as I didn’t do any shopping (besides the street booths).

  4. says

    @simplesimon

    LOL at Tax Filing day.
    Also, there are shady restaurants everywhere that don’t take credit or give receipts =D Just check college campuses!

    The other idea would be it’s preparation for the apocalypse when money has no value… Also, I think casual trade kind of keeps it in equals as opposed to going thru cash.

  5. simplesimon says

    @SJ

    You’re right, I’m sure those kind of restaurants exist everywhere in America. The thing that puzzled me was how China has TRILLIONS in cash reserves. I just haven’t bothered looking into why that is.

  6. sewall says

    There are plenty of examples of exchanges of services for non-monetary reward: Wikipedia, open source software development, are some prominent successful ones, but also ordinary assistance of a neighbor, friend, or family member. If money isn’t what motivates, what does? Some answers: Prestige, reputation, a feeling of fulfillment, any number of non-monetary rewards. The rewards in these cases are not only non-monetary, there is no clear unit of currency or store of value. Nothing like money at all.

    A barter system is similar in some ways. I think it aims exploit, foster, and build on the feelings one associates with non-rewarded services. There’s a sense of giving, even though you do get something quantifiable back, just because it isn’t dollars. I think a barter system is just attempting to take advantage of both systems: a money-only reward system and a non-monetary one.

    Yes, they could just use money. But if they did, I think many involved would find that something was lost. After all, anyone participating in the barter system could stop and just sell their services in the market. Why don’t they? The clearly are increasing their utility by participating in the barter system. One cannot dismiss this out-of-hand. Something is different, even if only psychologically. The associations with dollars are strong; there is much psychological baggage. Perhaps removing that changes the economy in an important way.

  7. says

    Jct: When I visited Europe in 1999, I paid for 39/40 nights of accommodations with an IOU for a night back in Canada worth 5 Hours.
    It’s only a matter of time until all systems based on the Time Standard of Money will use the internet to intertrade globally. I did.
    We need the United Nations Millennium Declaration UNILETS Resolution C6 to governments for a time-based currency to restructure the global financial architecture. Barter Timebanks are economic lifeboats.
    See my banking systems engineering analysis at http://youtube.com/kingofthepaupers with an index of articles at http://johnturmel.com/kotp.htm

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