Barter

What is 'Barter'

Barter is the act of trading goods or services between two or more parties without the use of money (or a monetary medium, like a credit card). In essence, bartering involves the provision of one good or service by one party and the receipt of another good or service from another party.

A simple example of a barter arrangement would be when a carpenter builds a fence for a farmer. Instead of the farmer paying the builder $1,000 in cash for labor and materials, the farmer could give him $1,000 worth of crops or foodstuffs.

BREAKING DOWN 'Barter'

Bartering is based on a simple concept: Two individuals negotiate to determine the relative value of their goods and services and offer them to one another in an even exchange. It is the oldest form of commerce, dating to before hard currency even existed. (Learn more about how bartering evolved, read From Barter To Banknotes.)

While our grandparent or great-grandparents' generation bartered with the limited goods they had on hand (i.e. produce, livestock), or services they could personally render (i.e. carpentry, tailoring, etc.) to someone they personally knew, today most Americans have access to a nearly unlimited source of potential bartering partners, courtesy of the internet.

Virtually an item or service can be bartered if the parties involved agree to the terms of the trade. Individuals, companies and countries can all benefit from such cashless exchanges, especially if they are lacking hard currency to obtain goods and services.

Benefits of Barter

Bartering allows individuals to trade items that they already have but are not using for items that they need, while also keeping their cash on hand for expenses that can't be bartered for, such as a mortgage, medical bills and utilities. Bartering can also have a psychological benefit; it can create a deeper personal relationship between trading partners than a typical monetized transaction. Bartering can also help people build professional networks and market their businesses.

On a broader level, bartering can result in a more optimal allocation of resources by exchanging goods in quantities representing similar values. It can also help achieve economies achieve equilibrium, which occurs when demand equals supply.

How Individuals Barter

When two people each have items the other wants, both people can determine the values of the items and provide the amount that results in an optimal allocation of resources. Therefore, if an individual has 20 pounds of rice that he values at $10, he can exchange it with another individual who needs rice and who has something that the individual wants that's valued at $10. A person can also exchange an item for something that he does not need because there is a ready market to dispose of that item.

How Companies Barter

Companies may want to barter their products for other products because they do not have the credit or cash to buy those goods. It is an efficient way to trade, as foreign exchange risks are eliminated. The most common contemporary example of business-to-business barter transactions is an exchange of advertising time or space; it is typical for smaller firms to trade the rights to advertise on each others' business spaces.

Bartering can also take place between companies and individuals. For example, an accounting firm can provide an accounting report for an electrician in exchange for having its offices wired.

How Countries Barter

Countries also engage in bartering when they are deeply in debt and are unable to obtain financing. Goods are exported in exchange for goods that the country needs. In this way, countries manage trade deficits and reduce the amount of debt they incur.

Tax Implications of Bartering

The Internal Revenue Service (IRS) considers bartering as a form of revenue and something that must be reported as taxable income.

Under U.S. generally accepted accounting principles, or GAAP, businesses are expected to estimate the fair market value of their bartered goods or services. This is done by referring to past cash transactions of similar goods or services and using that historical revenue as a reportable value. When it is not possible to accurately calculate this, most bartered goods are reported based on their carrying value.

As far as the IRS is concerned, estimated barter dollars are identical to real dollars for tax purposes; that means barter arrangements are considered the same as cash payments. The barter dollars are reported as income and taxed in the fiscal year in which the barter occurred.

The IRS further distinguishes between different forms of bartering, and there are slightly different rules for each kind. Most nonmonetary business income is reported on Form 1040, Schedule C - Profit or Loss from Business. Since bartering has tax implications, it's worth consulting a tax professional before making any significant commitments.

How to Barter

So how can you get started on successfully bartering? Here are some tips:

Identify your resources. What items do you have that you could easily part with? Use a critical eye to go through your home, and don't forget possessions you may have in storage or that another family member or friend is currently using. If you'd rather offer services, honestly assess what you could do for someone that they would otherwise be willing to pay a professional to do. While it can be a professional skill, it doesn't have to be something that you currently do for a living – it could be a talent like cooking, or a hobby like photography. In some cases you may even be able to barter your time as free labor.

Put a price tag on it. Successful bartering has to result in both people feeling that they got a good trade. That can only happen if you know how to realistically value what you're bringing to the table. If you have an item you'd like to trade away, get an accurate appraisal for it. Remember, you can't expect retail prices – barterers are looking for a bargain. Consider using the "selling" section on eBay to find out what online buyers have paid for similar items.

If you're trying to put a price tag on a service, call around for local estimates from professionals to see how competitively you can price your abilities. Remember to be honest about your skills and to factor in costs associated with the exchange; for example, shipping (for goods) or materials (for trading a skill).

Identify your needs. This is the time to get specific. No one's going to want to trade services or goods if you don't have a clear idea of what you need. Write down exactly what you are looking for in a barter exchange. In addition to specific items you may need, here is a list of potential services that you could barter for:

  • Babysitting/daycare
  • Car repair work
  • Lawn care, landscaping
  • Computer repair
  • Small home improvement projects
  • Plumbing
  • Moving assistance
  • Tax preparation
  • Financial planning
  • Orthodontist work
  • Medical care
  • Lodging

Search for bartering partners. After you know what you have to offer, and exactly what you need/want in a barter situation, it's time to look for swapping partners. If you don't have a specific person or business in mind, the best place to start is probably word of mouth. Let your friends, colleagues and social network about your specific need and what you want in a barter situation. Get word out to your friends on Facebook, LinkedIn and tweet about it on Twitter.

While you're online, check for swap markets and online auctions that have a bartering component like Craigslist.com (check under "For Sale" for the Bartering category), Swapace.com, SwapThing.com, Barterquest.com, U-Exchange.com, Trashbank.com and Ourswaps.com. Check for local bartering clubs as well; your local Chamber of Commerce may be able to provide you with information on such clubs in your area.

Make the deal. After you've found a barter partner, it makes good financial sense to get the agreement in writing. Make sure you detail what services or goods will be involved, the date of the exchange (or work to be done), and any recourse if either party doesn't make good on their part of the deal. If you're working through a membership-based bartering association they will likely provide all the structure and paperwork you need to ensure that the deal goes through.

Limits of Bartering

Bartering does have its limitations. Many bigger (i.e. chain) businesses won't entertain the idea and even smaller organizations may limit the amount of goods or services they will be willing to barter for (i.e. they may not agree to a 100% barter arrangement and instead require that you make at least partial payment). But in an economic crunch it can be a great way to get the goods and services you need without having to pull money out of your pocket.

Some businesses that may not do direct bartering with customers may swap goods or services through membership-based trading exchanges like ITEX or International Monetary Systems (IMS). By joining a trading network (which often charge fees), members are allowed to trade with other members for barter "dollars." Each transaction is charged a minimal fee; the Exchange not only helps facilitate the swap but they also handle the tax aspects of bartering, such as issuing 1099-B forms to participating members. You may be able to find a nearby exchange through the International Reciprocal Trade Association (IRTA) Membership Directory. Before you sign up and pay for a membership, however, make sure that members offer the types of goods and services you need. You don't want to be stuck in a situation with barter money or credit that you can't use.