Bartering is when two people trade or exchange one thing for another without using money. Bartering is probably the oldest form of economic activity and has been done even before the invention of money currency. It can involve the exchange of good or services, or both. Some common examples of bartering include:
- Goods for goods: “I’ll trade you this book for your hat”
- Goods for services: “I’ll trade you these tires in exchange for three hours of babysitting”
- Services for services: “I’ll mow your lawn if you clean my pool”
Usually, no money is exchanged between the parties. But sometimes one party may offer money if there is a significant difference in the value of the items exchanged. Goods or services obtained through bartering must be reported in tax statements. Sometimes the bartering agreement will function as a binding legal contract.
Bartering tends to happen in an informal setting between persons who are already acquainted. However, some people choose to join professional bartering exchanges or networks to engage in high-level corporate bartering. These bartering exchanges often function like a small economy, complete with their own form of currency.
Also, bartering is common amongst parties resolving legal disputes. For example, in out-of-court settlements, the defendant may attempt to pay for damages by bartering their services or goods instead of money.
Most of the time a barter deal meets all the legal requirements of a binding contract, including offer and acceptance, consideration, etc. This is especially true if the agreement creates obligations or legal duties for both parties. In order to create a contract, usually each party is required to render something of value in exchange for another item of value.
Thus, suppose that the parties agree that one will trade a car for a boat. If one party delivers the car, but the other does not deliver the boat, then the other may be legally required through a lawsuit to keep their end of the agreement. Even if there is no writing, a court can still find that an oral contract existed if the parties made an oral agreement.
For this reason, it is very important to write down the agreement in the form of a contract if you suspect that there may be a dispute. A written contract is highly recommended if the value of the exchange exceeds $1,000. Also, since barter agreements must conform to contract laws, you should not engage in bartering if you suspect that the goods are stolen or the services are illegal.
Since bartering is considered trading, you must report the fair market value of the goods or services in your income tax return. Likewise, if it is a business that engaged in the bartering, they must make reports of profits from bartering in their federal and state tax return forms.
Barter exchange networks are also required to report the transactions of their members under the Tax Equity and Fair Responsibility Act of 1982. Trading costs may sometimes be deductible from taxes if the business qualifies.
Thus, be sure to include information regarding barter transactions in your income reports, even if the transaction was informal or involved an item of small economic value
Bartering can be as simple as trading items in a garage sale, or it can involve a complex transaction involving corporate assets. You should contact a lawyer if you will be bartering for important items or if you anticipate a future dispute over the goods. An experienced commercial attorney can finalize the agreement in a contract so that the parties will have documented evidence of the transaction.