All Barter Deposits Are Not Taxable Income
Every January, as required by law under TEFRA, all of the approximately 500 organized trade exchanges in the U.S. provide the IRS with statements showing the total amount of barter credits deposited into each and every member's account during the previous calendar year.
(Your trade exchange also provides this information to you in the form of 1099Bs, "Proceeds from Broker and Barter Transactions.")
However, some of these barter deposits may not be taxable income. Here is a look at five kinds of barter transactions which are sometimes improperly taxed.
A taxpayer is permitted under the law to give any other taxpayer up to $10,000 during a tax year, with no tax consequences of any kind to the donor or to the recipient.
But if a trade exchange member gives barter credits to another member (as a gift), the amount of the donation is posted in the account of the recipient. And there is no way for the barter company to recognize the tax nature of the deposited funds, any more than your bank can identify which of your cash deposits are taxable.
Trade Dollars Received As Loan Repayments
As a member of a trade exchange, you may lend some trade dollars to another member. Later, when you are repaid with trade dollars deposited into your account, they appear as credits.
On your next monthly statement these trade dollars that have been repaid to you will appear as a "sale" or income transaction. And at year-end it will be reported as such on the 1099B Form.
It should be noted that if you are charging interest on the loan, either in the form of trade dollars or in cash, the interest is reportable as income in the year in which it is received.
Cash Purchased Trade Dollars
If you have a need for more barter credits, and are unable to borrow them, you can usually buy them from another trade exchange member often at a cash discount-sometimes as high as forty or fifty percent. However, these cash purchased (discount) trade dollars are not taxable.
As a trade exchange member you may have two or more accounts, or sub-accounts, and thus move credits back and forth between these accounts. In this scenario you'd be taxed twice on the same barter dollars-once when depositing them into your primary account, and again when moving them to a second account.
Although account transfers are not taxable, the IRS will expect you to pay a tax on (what appears as) all deposits...because they don't realize certain credits fall into the non-taxable category.
Borrowed Trade Credits
There may be a situation where you need to borrow trade dollars with an agreement to repay the loan, perhaps with either cash or barter credits as interest.
The borrowed credits that you deposit into your account should not be taxed, any more than cash borrowed from a bank or credit union is taxable.
The solution to avoiding taxation in the above situations on non-taxable trade dollars is to insert, and number, a table at the back of your income tax return titled, "Other Income Barter, Form 1040 Line 21."
The table should show the amount of barter credits on your 1099B, less any barter credits received as a gift, less any credits received as loan repayments, less any credits borrowed from the trade exchange or a member, less any credits purchased for cash, and less any credits transferred from one account to another.
Subtract all these minuses from the amount on the 1099B and write that number on Line 21 of Form 1040, with a note to see attached table.
(The information given here is educational, and you should consult your own tax advisor to determine how to report barter credit income.)
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