What is barter?
Barter is an act of exchanging goods or services between two or more parties, sometimes more without using a monetary medium, such as physical cash or credit card. Essentially, a barter involves providing one good or service from one party in barter for another good or service from another.
A simple example of a barter agreement is a bricklayer building a fence for a farmer. Instead of paying the builder $500 in cash for labor and materials, the farmer could reward the bricklayer with $500 in crops or agricultural products.
Understanding the barter
Barter is based on a simple concept: Two individuals negotiate to determine the relative value and services and offer a uniform swap. It is the oldest form of dealing, dating back to the existence of the first man.
While the current senior generation has had to barter with the limited assets they owned (i.e., animal production and breeding) or the services they could personally provide (i.e., sewing or carpentry) to someone they knew, most Americans today have access to an almost unlimited source of potential Internet bartering partner(s).
Virtually any item or service can be traded if the parties involved agree to the trade terms. Individuals, businesses, and countries can benefit from these cashless barters, especially if they do not have hard currency to obtain goods and services.
The advantages of barter
Barter allows people to trade items they own but don't use for items they need while keeping cash on hand for expenses that cannot be paid for through barterings, such as mortgages, medical bills, and utilities. Bartering can also have a psychological benefit, as it can create a deeper personal relationship between trading partners than a generally monetized transaction. Barter can also help people build professional networks and market their businesses.
Barter can lead to an optimal allocation of resources at a broader level by exchanging goods in quantities representing similar values. Bartering, when applied, can also help economies achieve equilibrium, which occurs when demand equals supply.
How people barter
When two people have desired items, they can determine the item values and provide the value that results in optimal resource allocation. So if a person has 10 pounds of wheat, which is worth $20, they can trade it with another person who needs wheat and has something the individual wants, which is valued at $20. A person can also barter an item for something that the individual does not need because there is a ready market for it.
How businesses barter
Businesses may want to trade in their products for other products because they don't have the credit or the money to buy them. It is an efficient way to trade, as currency risks are eliminated. The most common contemporary example of barter transactions between companies is the barter of advertising time or space; it is common for small businesses to negotiate advertising rights in retail spaces. The barter also takes place between companies and individuals. For example, a tax firm may provide an accounting report to a cleaning agency in return for their services.
How countries barter
Countries trade even when they are deeply in debt and unable to obtain finance. Goods are exported in barter for goods the country needs. This way, countries reduce the amount of debt they incur by managing trade deficits.
Modern-day barter
Although primarily associated with commerce in ancient times, commerce has now been reinvented via the Internet. Online trading has become particularly popular among small businesses since the 2008 financial crisis, culminating in the Great Recession. As prospects and sales dwindle, small businesses have increasingly turned to income generation. According to the New York Times, the barters reported double-digit increases in listings in 2008. The barters allowed members to find new customers for their products and access goods and services using unused inventory. The barters also used custom currencies, which could be accumulated and used to purchase services such as hotel stays while on vacation.
Tax implications of barter
The Internal Revenue Service (IRS) considers barter to be a form of income and should be declared taxable income. In accordance with GAAP (generally accepted accounting principles) in the United States, companies must estimate their products' fair market value or services marketed. This is done by relating to past cash transactions for similar goods or services and using that historical income as the reported amount. When the value cannot be calculated accurately, most goods traded are reported based on their book value.
For the IRS, the estimated barter dollar is the same as the real dollar for tax purposes, which means that barter transactions are treated as cash payments. The barter dollar is recognized in profit or loss and taxed in the fiscal year in which the barter takes place.
The IRS also distinguishes between different trading forms, and there are slightly different rules for each type. Most non-cash income from a business is reported on Form 1040, Schedule C - Business Gains or Losses. Because barter has tax implications, it's worth consulting with a tax professional before making a major commitment.
Summary
Barter is the exchange of goods and services between two or more parties without using money.
Individuals and businesses barter goods and services based on equivalent estimates of prices and goods.
It is the oldest form of commerce.
The IRS views barter as a form of taxable income.
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