Barter - Explained
What is Bartering?
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What is Bartering?
Bartering takes place when two or more parties exchange goods or services instead of using money as a medium of exchange. It means if a party offers a good and service to another party, the latter also offers some good or service in return.
Is Bartering Taxed?
According to the Internal Revenue Service (IRS), profits from bartering is a type of revenue that is required to be included in the category of taxable income. Further, a commercial entity that engages in bartering is obligated to collect sales taxes from the purchaser.
As per the Generally Accepted Accounting Principles of the United States, companies should ascertain the fair market value of the products and services to be bartered. For determining the fair value, the person should consider the previous cash transactions of the same type of products or services, and then use that figure as a reportable amount. In case it is not feasible to ascertain the right value of goods, they can use the carrying value for reporting purposes.
The barter amount is considered income, and taxable in the fiscal year when the exchange of goods or services took place. The IRS classifies the mechanism of bartering in different several types followed by a distinct set of rules and regulations. Most non-financial organizational revenue gets reported on Form 1040, Schedule C - Profit or Loss From Business.
Academic Research on Barter
- Sovereign debt as intertemporalbarter, Kletzer, K. M., & Wright, B. D. (2000). Sovereign debt as intertemporal barter.American economic review,90(3), 621-639.
- Understandingbarterin Russia, Commander, S. J., & Mumssen, C. (1998). Understanding barter in Russia. This paper analyses the incidence and growth of non-monetary transactions - barter, veksels, debt offsets, tax offsets and other monetary surrogates - in Russia. The empirical backbone of the paper is a survey of 350 - predominantly industrial - firms, carried out in October and November 1998. The paper provides an analytical framework for understanding both firm-level incentives for using barter and the reasons for its phenomenal growth since 1993. Having examined some of the costs of Russia's non-monetary economy, the paper discusses a number of policy options.
- Barterand monetary exchange under private information, Williamson, S., & Wright, R. (1994). Barter and monetary exchange under private information.The American Economic Review, 104-123. We develop a model of production and exchange with uncertainty concerning the quality of commodities and study the role of fiat money in ameliorating frictions caused by private information. The model is specified so that, without private information, only high-quality commodities are produced, and there is no welfare gain from using money. With private information, there can be equilibria (and sometimes multiple equilibria) where low-quality commodities are produced, and money can increase welfare. Money works by promoting useful production and exchange. In efficient monetary equilibria, agents adopt strategies that increase the probability of acquiring high-quality output.
- Barter, Dalton, G. (1982). Barter.Journal of Economic Issues,16(1), 181-190.
- Clearing algorithms forbarterexchange markets: Enabling nationwide kidney exchanges, Abraham, D. J., Blum, A., & Sandholm, T. (2007, June). Clearing algorithms for barter exchange markets: Enabling nationwide kidney exchanges. InProceedings of the 8th ACM conference on Electronic commerce (pp. 295-304). ACM.