What is Barter and Where Do You Report Barter 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.
Barter income is usually reported on Schedule C for individuals and subject to both income and self
employment tax. Businesses report it as income on the appropriate lines. Barter can also lead to
business deductions.
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 1099B Proceeds From Broker and Barter Exchange
Transactions . The IRS also will receive the same information.
Following are some examples of bartering from the IRS.
Example 1
You are a self-employed financial planner who performs services for a client, a small business
corporation. The corporation gives you shares of its stock as payment for your services. You must
include the fair market value of the shares of stock in your income on Schedule C or Schedule C-EZ of
Form 1040. The expenses you pay in the performance of the financial planning services are also
deductible.
Example 2
You own a small apartment building. An artist trades you a painting in return for six months’ rent-free
use of an apartment. You must report the fair market value of the artwork as rental income on Schedule
E Supplemental Income and Loss on Form 1040. Generally, this would be the fair rental value of the
apartment for six months. You can claim your normal rental expenses associated with the barter of the
apartment. The artist must report the fair rental value of the apartment in income on Schedule C, Profit
or Loss From Business (Sole Proprietorship), or Schedule C-EZ, Net Profit from Business, of Form 1040 as
the artist would for any other sale of a painting. The artist can claim the normal cash business expenses
associated with the bartered work of art such as canvas, paint, brushes, supplies and materials.
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What is Barter and Where Do You Report Barter Income?
Example 3
You are a self-employed house painter. In return for painting his personal residence, your attorney
agrees to perform personal legal services. If you would normally paint such a residence for $3,000 you
would report the $3,000 in your gross receipts and you would be able to deduct the ordinary and
necessary business expenses associated with painting the residence (such as paint, brushes and
equipment rentals) on Schedule C or Schedule C-EZ of Form 1040. The attorney must also report the fair
market value of the services in gross income on Schedule C or Schedule C-EZ of Form 1040, and deduct
his ordinary and necessary business expenses associated with the legal services.
Example 4
You are a self-employed owner of an online retail Web site that sells bowling shirts, shoes, balls and
supplies. In return for fully equipping a self-employed owner of an online retail fishing shop with
bowling equipment with a fair market value of $1,000, you receive fishing rods and clothing also valued
at $1,000. You must include the fair market value of the equipment you receive in your income on
Schedule C or Schedule C-EZ of Form 1040. You will also increase your cost of goods sold by decreasing
your inventory for the cost or other basis of the bowling equipment given up. The fishing shop owner
will handle record keeping the same way if both maintain inventories. Both you and the fishing shop
owner will report the income of $1,000.
Record-keeping Tip
Be sure to use a reasonable fair market value for the property or services received in a barter
transaction to include in your income. The transaction is not a “wash” if you report the fair market value
of the property received that is greater than your cost or basis in the property given up. In Example 4, if
the bowling equipment given up has a cost or other basis of $500 to you there is a $500 gross profit on
the transaction since the fair market value of the fishing equipment received is $1,000. Simply put, you
should identify the transaction in your records and report the income and any related business
deductions and cost of goods sold on Schedule C or Schedule C-EZ of Form 1040
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