Barter is one of the oldest forms of trade in which one company offers its services or goods to another company for services or goods in return. These exchanges do not involve cash, are typically conducted as a private transaction between the two parties and are limited by the goods or services the trade partners offer.
Barter exchanges are third parties, often organizations, whose members contract with the barter exchange to trade their goods or services with other members. While barter exchanges exist in the brick and mortar world, many exchanges (such as Bartercard) have moved their business model online to provide a faster electronic exchange for their members.
Barter exchanges act as a third party facilitator and bookkeeper which manages the transactions for all of the members and keeps track of the trades. Barter exchanges often use a trade currency referred to as “barter dollars” or “trade dollars” to track transactions and create a basis for reporting purposes for member companies. Barter or trade dollars are used by member companies to buy and sell goods and services.
The IRS views the barter dollars as having the same value as U.S. dollars for taxation purposes, and barter exchanges are required to issue a 1099B to the member companies and the IRS. The 1099B shows the barter dollars for earned and unearned contracts within the exchange which means the IRS will treat these earnings as income for the member business. The barter income will be taxed at the same rate as the member’s ordinary income which will mean a tax consequence in U.S. dollars for income in trade dollars. Because the IRS does not accept trade dollars for the tax liability it is imperative that businesses who utilize barter exchanges as part of their business model remain current on their bookkeeping throughout the year to prevent an unintended tax liability from accruing.
For a member company to properly manage its barter accounts it needs to make sure that monthly reconciliations of both the cash and barter accounts are maintained, and that management is reviewing reports for the overall barter income versus cash income throughout the year. The key to successfully using barter is to balance the cash income and barter income at the proper percentage to avoid a tax liability greater than the member’s cash available for paying tax liabilities. The exact percentages differ by company and industry which means a strategy for dealing with the tax consequence should be developed prior to incorporating barter into a business model. Businesses should consult with their bookkeepers and accountants prior to using barter to plan a strategy for using trade dollars in the most effective manner for limiting potential tax consequences.
For more information about how the IRS views barter dollars visit: