Barter and Taxation explained
The barter system is alive and well in this depressed economy. Even though bartering has been around since the beginning of humanity, Congress has decided it is a taxable event and has instructed the IRS to find the bartering taxpayers and make them pay a tax on the trades. When anyone trades goods or services for other goods or services it is barter.
The issue is whether or not it is a tax-related event that must be shown on the tax return. When I trade the preparation of a tax return for any service or goods, it is taxable income to me. The other person only has to show the equal value of the trade as income to them if they are in a business. If I receive dental work in trade, then the dentist must show the same value as income. If I trade tax return prep for apples and squash and the person I traded with is not a farmer, then that person does not show the barter as income while I do. I show the income and they get to write off the tax prep trade value on next year's tax return as an expense.
If the trade was with a farmer who files a farming tax return, then that person must show the trade as income. I show the income and they show the income. I get no tax write off for the food while the farmer gets to write off my fees. When my neighbor does my lawn and I give him a home-made apple pie fresh out of the oven there is no trade at all for either of us because he is not in the lawn care business and I am not a baker by trade. If I watch your children and you pay me with some car repairs and neither of us is in the daycare nor car repair business, then that is not a barter tax event.
There are various ways to look at the barter system. If you trade your non-business services for medical care, then the doctor shows the income and you can use the trade value on your itemized deductions form "A" as a medical expense. When you give away your unwanted clothes to the Goodwill, you get a tax deduction. You traded goods for a value. That is not a form of barter. The Goodwill store shows the value of your donation as income and reports that to the IRS each year. You get a tax deduction.
What the IRS is looking for in an audit is where a business does trades and does not show the income on the tax return. They are also looking for people who do a lot of trades and show nothing on their tax returns. I will stop here. I could go on for pages. This is a complicated area of tax law. Please enter any comments or questions below. You can also use the comments sections to ask me questions which I will either answer on this page or start another page with your question as the new topic of the day. Have a great day.
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