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 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:
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.