Barter Versus Taxes

Kevin Simpson wrote up an article for the Denver Post, “Barter system booms in Colo.” Simpson talked to a few people who have been trading goods and services directly, but I’m surprised that he didn’t mention the tax ramifications.

I Googled “‘tax income’ barter,” and the top hit is the following information from the Internal Revenue Service:

Topic 420 – Bartering Income

Bartering occurs when you exchange goods or services without exchanging money. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of goods and services received in exchange for goods or services you provide must be included in income in the year received.

Generally, you report this income on Form 1040, Schedule C (PDF), Profit or Loss from Business. If you failed to report this income, correct your return by filing a Form 1040X. Refer to Topic 308 for Amended Return information.

A barter exchange or barter club is any person or organization with members or clients that contract with each other (or with the barter exchange) to jointly trade or barter property or services. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis.

The Internet has provided a medium for new growth in the bartering exchange industry. This growth prompts the following reminder: Barter exchanges are required to file Form 1099-B for all transactions unless certain exceptions are met. Refer to Barter Exchanges for additional information on this subject. If you are in a business or trade, you may be able to deduct certain costs you incurred to perform the work that was bartered. If you exchanged property or services through a barter exchange, you should receive a Form 1099-B (PDF), Proceeds From Broker and Barter Exchange Transactions. The IRS also will receive the same information.

Please refer to our Bartering page [see the original document for related links] for more information on bartering income and bartering exchanges.

And how many people bartering in Colorado are filling out the legally required forms and paying the legally required taxes? My guess is the percent is less than two.

In today’s world, you can hardly do anything without being required to fill out a bunch of government forms and pay some bureaucrat or other protection money. There’s nothing so simple, straightforward, or beneficial that bureaucrats can’t turn it into a legal nightmare. The IRS’s documentation reads like it comes out of the world of Brazil.

The IRS imagines that barterers are going to refer to Topic 308 so that they can fill out Form 1040X. Good luck with that.

“I hereby inform you under powers entrusted to me under Section 476 that Mr. Buttle, Archibald, residing at 412 North Tower, Shangri La Towers, has been invited to assist the Ministry of Information with certain inquiries and that he is liable to certain financial obligations as specified in Council Order RB-stroke-C-Z-stroke-nine-O-seven-stroke-X.”

5 thoughts on “Barter Versus Taxes”

  1. If barter income wasn’t taxable, people would have formed enormous barter economies, thereby escaping taxation, long ago. Like so much of the tax code, barter income rules are in place to close loopholes.

    Incidentally, barter income is also taxable under the “Fair Tax”, which really goes to show you that the “Fair Tax” is not much more than an income tax in sales tax’s clothing (the only substantive difference is the timing of the taxation of savings – under the “Fair Tax” saved earnings aren’t taxed until you spend them, kind of like giving everyone unlimited IRA accounts).

    You can’t eliminate barter income rules without eliminating income taxes and sales taxes, which, incidentally, would be perfectly fine with me, and I’m sure with you as well, Ari.

  2. I strongly suspect that more people have moral objections to taxing “barter income” than they do taxing “money income.” If this is true, perhaps it would be useful to start there (that taxing barter transactions is objectionable) and then show that the difference between barter and paying someone with money (an indirect means of exchange) is irrelevant to how objectionable the income tax is.

  3. I don’t know how useful that is, Brian, unless your goal is to replace the income tax with property taxes, and/or inheritance taxes, and/or Pigovian taxes. I’m not even sure most people’s objection to the taxation of “barter income” is a moral one, rather than a practical one. Considering the concept of taxing barter income does show the practical problem with the income tax, but I don’t think it shows the moral problem.

    The moral argument for taxation usually comes down to externalities, especially positive externalities (the argument being that those who benefit from a government service have a moral duty to pay for it). I found George Reisman’s arguments against the externalities doctrine to be especially persuasive, but then he was preaching to the choir. I had already accepted the moral principle of eliminating taxation – Reisman merely answered one of my final remaining objections to it.

  4. I see that “Favorpals is a proud sponsor of President Obama’s Renew America Together Initiative.” I take it, then, that everybody who uses Favorpals takes extra care notify the Obama administration of their tax burdens involving barter.

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