In the United States, there’s nothing wrong with the bartering or barter system, and the trade is perfectly legal in its intended use. What is considered illegal is creating an instrument to represent a value and engaging in trade using the instruments in place of the real thing.
What Is Bartering?
Bartering is when two parties directly exchange one asset for another without involving money or another medium of exchange such as gold or silver.
Countries, companies, and individuals can all engage in bartering, which is possibly the oldest form of economic activity that existed even before the invention of money currency.
This form of direct trade can involve the exchange of goods, services, or both. It tends to happen in informal settings among traders who're already acquainted, though some people choose to join professional bartering networks and engage in high-level or corporate bartering.
The corporate bartering exchanges can function like a small but complete economy with its form of currency. Bartering income or goods and services obtained through bartering should be reported in tax statements.
Are Bartering Deals Contracts?
Often, the bartering agreement functions as a binding legal contract since most barter deals meet all the contract's legal requirements, such as offer and acceptance, consideration, and more.
This is expressly true if the bartering agreement builds legal duties or obligations for both parties. To create a contract, each party should render something of value in exchange for another valuable item.
In an instance where two parties agree to trade a car for a boat, if one party gives the car, but the other refuses to deliver the boat, the failing party may be legally required through litigation to keep their end of the bargain.
Though the court can still find that an oral contract existed even if there’s no writing, a written contract is recommended, especially if the value of the exchange is above $1,000. And since barter agreements should comply with contract laws, individuals shouldn’t engage in bartering whenever they suspect that involved goods are stolen or illegal.
What are the Tax Implications for Bartering in the United States?
Since bartering is considered legal trading in the U.S, the Internal Revenue Service (IRS) treats goods and services gained through bartering as taxable income. So, the receivers of bartering income may be required to make estimated tax payments.
The IRS obliges U.S. taxpayers to report the fair market value of the goods or services in their income tax return through bartering on the Schedule C form (Form 1040 or 1040-SR).
As companies in the U.S. are required to report the value of all goods received as income, they must also report income from bartering in their federal and state tax return forms. This can have a significant impact on their taxes.
Note that there are more special rules that apply whenever you use bartering exchange or if your business or trade comprises bartering activities. You can learn more about the regulations when you visit the Bartering Tax Center.