Barter is a form of trade in which people exchange goods or services without using money. It's been a way of doing business since time immemorial, and was the inspiration for the currencies we have now.
Barter has become an increasingly popular way for friends, relatives, and even total strangers to do business in an economy where cash can be in short supply.
But newcomers to barter should be aware that this seemingly innocent exchange of goods and services falls under the purview of the IRS.
Accountant Richard Hurley owns Paragon Tax Services in Astoria. He said the U.S. Government's laws about barter have been the same since they were first written in 1913.
Under the law, barter is just another kind of business transaction, and one that results in income - even if the income is in the form of services or goods.
The government says it's taxable, which means the IRS wants each party in the transaction to report the fair market value of the goods or services exchanged, so the proper income tax can be assessed.
Say you have a friend who's a plumber and you're a carpenter. He installs new plumbing for you, and you help him add an extension on his house. You've just done a barter transaction.
"If I give you this," Hurley said, pointing to a $100 bill of play money that he uses to illustrate points with clients, "money has value. It's a piece of paper with purchase value."
But Hurley said currency, under the law, can take many forms.
"If I pay using a basket of apples," he said, "That's currency and has value too."
Installing someone's plumbing or performing carpentry work in a barter transaction also qualifies as currency.
To understand what might seem to many to be the IRS's "party pooper" attitude about barter, you might look at it this way: exchanging money in return for services is actually itself a form of barter.
How does the IRS decide the value of a particular transaction?
The first step is to determine the fair market value of the services or goods exchanged.
Hurley defined "fair market value" as "what a willing and knowledgeable buyer and a willing and knowledgeable seller both acknowledge as a fair price."
In recent years, the Internet has helped make this easier to figure out.
"EBay has changed this tremendously," Hurley said. "You can look up the value of almost anything."
Barter networks have also sprung up on the Web, making their transactions traceable by the IRS, but what's to prevent private citizens and businesses from just not reporting barter exchanges that may never be discovered and are unlikely to be traceable?
Hurley said barter is a subset of larger financial issues. Why conform to the IRS rules to begin with?
"Because it's the law and we should obey the law," said Hurley. "It's a matter of morality - it's the right thing to do. And, to not report barter is tax evasion."
Hurley said the IRS does an excellent job of encouraging compliance with the law through intimidation. The overall result is that 86 percent of U.S. residents comply with tax laws. But that still leaves 14 percent who don't - a group that Hurley said includes "black market and criminal" transactions.
He said sometimes in rural communities it's to a person's financial advantage to report barter.
"Some of my rural clients want to show income," he said. That means a farmer who allows his neighbor to graze cattle on his land can claim the backhoe work his neighbor did for him in return as taxable income. "If you are farming property for income purposes you pay a lot less property tax."
Still, many time-honored rural practices are hard to pin down.
"A barn raising, for example," Hurley said, smiling, "is a tax nightmare. All those people offering goods and services."
However, Hurley added, if the taxing authorities made barter tax-free, we would likely all start bartering and the whole taxing system would collapse.
One form of income taxpayers usually don't have to report is revenue from garage sales, because the assumption is that they've sold items for less than what they paid for them.
"You've lost money on a personal asset," Hurley said of garage sale organizers. "Most items are sold at a loss."
Before you get in a panic about the shingles your roofer brother-in-law helped you put on the house, consider this: barter violations are not high on the IRS's priority list.
"In a practical matter, does the IRS spend hours trying to track down this kind of thing? No." Hurley said. "They probably have more lucrative matters to pursue."
The scoop about barter
Barter is an ancient way of doing business where people exchange goods and services instead of cash.
Barter is taxable income. The IRS says taxpayers should generally report this income on Form 1040, Schedule C.
A barter club or network is an organization whose members contract with each other to trade property or services. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis.
According to Wikipedia, "the worldwide organized barter exchange and trade industry has grown to an $8 billion a year industry and is used by thousands of businesses and individuals."
Barter can be a great way for businesses to get what they need without using cash.
When assessing the value of a transaction, parties need to find out the "fair market value" of the traded goods or services.
EBay can be a great source of info about fair market value.
Garage sale income is generally not taxable because sellers usually take a loss on items they sell.
Before you start panicking about unreported barter transactions, keep in mind the IRS considers barter a pretty low priority compared to other more pressing and lucrative tax issues.