Bartering occurs when two or more parties, such as individuals, businesses and nations, exchange goods or services evenly without the use of a monetary medium. While a barter economy is considered more primitive than modern economies, barter transactions still regularly transpire in the marketplace.
Below are three basic examples of bartering for goods and services, along with a common contemporary barter exchange.
- Barter is an alternative method of trading where goods and services are exchanged directly for one another without using money as an intermediary.
- For instance, a farmer may exchange a bushel of wheat for a pair of shoes from a shoemaker.
- While uncommon, barter still does occur on the margins in some markets such as the business-to-business (B2B) space and some consumer services.
How Bartering Works
1. Bartering With Consumer Goods
In its simplest form, bartering is the exchange of one valuable product for another between two individuals. Person A has two chickens but wants to get some apples; meanwhile, Person B has a bushel of apples but wants some chickens. If the two can find each other, Person A might trade one of his chickens for a half-bushel of Person B's apples. No medium of exchange is used.
The problem posed by simple bartering is what economists call the "double coincidence of wants." In this case, Person A is not satisfied unless he crosses paths with a chicken-wanting apple-carrier, while Person B needs an apple-wanting chicken-carrier.
While economists often tout the invention of money as a solution to barter and the double-coincidence of wants, there is actually no historical or archaeological evidence that a barter society ever existed on earth at any point in history: wherever there has been trade, there has been money.
While it is mostly associated (incorrectly) with commerce during ancient times, bartering has been reinvented in this era through the Internet. Online barter exchanges became especially popular with small businesses after the 2008 financial crisis, which culminated in the Great Recession. As prospects and sales dwindled, small businesses increasingly turned to barter exchanges to generate revenue. According to the New York Times, barter exchanges reported double-digit increases in membership in 2008. The exchanges enabled members to find new customers for their products and get access to goods and services using unused inventory. The exchanges also used custom currency, which could be hoarded and used to purchase services like hotel stays during vacations. The barter economy during the financial crisis was estimated to have reached almost $3 billion.
2. Bartering With Consumer Services
Bartering can also take place as an exchange for services. Services are salable acts, such as performing mechanical work or providing legal representation. If one professional agrees to perform tax accounting for another professional in exchange for cleaning services, this is a barter transaction.
Much like with consumer goods, a barter transaction involving consumer services has demand and supply limitations.
Here is a list of potential services that people barter for:
- Car repair work
- Lawn care/landscaping
- Computer repair
- Small home improvement projects
- Moving assistance
- Tax preparation
- Financial planning
- Orthodontist work
- Medical care
- Lodging (e.g. home swaps)
3. Modern Advertising Services
The most common form of business-to-business bartering in modern economies involves the trading of advertising rights.
In these cases, one company sells its available ad space to another company in exchange for the right to advertise on the second company's space. These can be for television rights, internet advertisements, radio rights, actual billboards or various other types of media.
Tax Implications of Bartering
The Internal Revenue Service (IRS) considers bartering a form of revenue and something that must be reported as taxable income. Under the U.S.'s generally accepted accounting principles (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 the value, most bartered goods are reported based on their carrying value.
For the IRS, estimated barter dollars are identical to real dollars for tax purposes, which means that 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 type. 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.