Barter (or Bartering)

What Is Barter?

Barter is an act of trading goods or services between two or more parties without the use of money — or a monetary medium, such as a credit card. In essence, bartering involves the provision of one good or service by one party in return for another good or service from another party.

A simple example of a barter arrangement is a carpenter who builds a fence for a farmer. Instead of the farmer paying the builder $1,000 in cash for labor and materials, the farmer could instead recompense the carpenter with $1,000 worth of crops or foodstuffs.

Understanding Bartering

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 back to a time before hard currency even existed.

While the current senior generation bartered with the limited goods they had on hand (i.e., produce and livestock) or services they could personally render (i.e., carpentry and tailoring) to someone they knew, today most Americans have access to a nearly unlimited source of potential bartering partners through the internet.

Virtually any 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, particularly if they are lacking hard currency to obtain goods and services.

Benefits of Barter

Bartering allows individuals to trade items that they own but are not using for items that they need, while keeping their cash on hand for expenses that cannot be paid through bartering, such as a mortgage, medical bills, and utilities.

Bartering can have a psychological benefit because 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.

In an economic crunch, bartering can be a great way to get the goods and services you need without having to pull money out of your pocket.

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

How Individuals Barter

When two people each have items the other wants, both parties can determine the values of the items and provide the amount that results in an optimal allocation of resources.

For instance, if an individual has 20 pounds of rice that they value at $10, they 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 the individual 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 because the risks of foreign exchange are eliminated.

The most common contemporary example of business-to-business (B2B) 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 also occurs among companies and individuals. For example, an accounting firm can provide an accounting report for an electrician in exchange for having its offices rewired by the electrician.

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.

Modern Barter Exchanges

While it is mostly associated 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.

According to The New York Times, barter exchanges reported double-digit increases in membership in 2008.

As prospects and sales dwindled, small businesses increasingly turned to barter exchanges to generate revenue. These 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 such as hotel stays during vacations. The barter economy during the financial crisis was estimated to have touched $3 billion.

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.

How to Barter

So how can an individual successfully barter? 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 consider possessions you may have in storage or that another family member or friend is currently using. If you would prefer to offer services, honestly assess what you could provide for others that they would otherwise pay a professional to do. It could be a skill or a talent, or even a hobby, such as photography. 

Put a price tag on it: Successful bartering must result in the satisfaction of both parties. This can only happen if the items bartered are realistically valued. If you have an item you would like to trade, obtain an accurate appraisal. An item is only worth what someone is willing to pay for it. Therefore, do your research and look at the "selling" section on eBay to find out what online buyers have paid for similar items.

To value a service, call around for local estimates from professionals to find out 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: Be specific about 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:

Search for bartering partners: After you know what you have to offer and exactly what you need/want in a barter situation, find a barter partner. If you don't have a specific person or business in mind, try word of mouth. Let your friends, colleagues, and social network know about your specific need and what you want in a barter situation. Use Facebook, LinkedIn, and Twitter.

Check online swap markets and online auctions that have a bartering component, such as Craigslist.com (check under "For Sale" for the Bartering category), Swapace.com, and Barterquest.com. Also, check for local bartering clubs. Your local Chamber of Commerce may be able to provide you with information on similar clubs in your area.

Make the deal: After you've found a barter partner, 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 reneges on their part of the deal. If you are working through a membership-based bartering association, they will likely provide all the structure and paperwork you need for the deal.

Limits of Bartering

Bartering does have its limitations. Much bigger (i.e., chain) businesses will not entertain the idea and even smaller organizations may limit the dollar amount of goods or services for which they will barter — they may not agree to a 100% barter arrangement and instead require that you make at least partial payment.

Some businesses that may not directly barter with customers might swap goods or services through membership-based trading exchanges such as ITEX or International Monetary Systems (IMS). By joining a trading network, which often charge fees, members can trade with other members for barter "dollars." Each transaction is subject to a minimal fee; the exchange facilitates the swap and manages the tax components of bartering, such as issuing 1099-B forms to participating members.

You may 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. Otherwise, you may find yourself with barter money or credit that you cannot use.