The economy may be growing despite a national perception of the contrary, but with that expansion hovering below two percent of GDP and an unemployment rate in striking distance of ten percent, it hardly affects the average person. While the media is inundated with polarized commentary, job prospects are lean and banks continue to be stingy with credit. Taken together, all of this forces the average American to stretch a stagnating paycheck to cover growing expenses. With cash growing tight, other methods of payment are spring up. Despite bartering’s cyclic demise in the United States, this practice is experiencing a new life.
What is Bartering?
An alternative means of obtaining necessities, bartering was common in the Great Depression. In the “Great Recession” of the early twenty-first century, bartering again holds an enormous appeal. By exchanging goods and services for one another, some transactions can be simplified and some can proceed when they could not in a pure cash economy. Therefore bartering often flourishes when the value of currency fluctuates, or currency and credit are entirely unavailable.
Used both as a noun and a verb, Merriam-Webster lists the verb’s definition as “to trade by exchanging one commodity for another”. In the modern world it is the exchange of commodities and services at fair market value, a monetary transaction without cash.
Bartering by Shira Golding
The History of Bartering
Bartering is an ancient human phenomenon, and one of those characteristics that makes homo sapiens unique. Human exchanges are not exclusively driven by the instinct for survival or propagation of the species as they are for plant and other animal life. The human bartering system includes the desire for goods and services not necessary to life.
Before the use of cowrie shells or the first coins in China (dated circa 1000 BCE), items and services were the holders of value and wealth. A hog had a certain value to be exchanged for grains, vegetables, or cloth. Mythology records bartering, such as the Genesis story describing Tamar’s contract with her father-in-law Judah; his seal and cord documented his identity and a kid was to be her payment. Greek mythology recounts Agamemnon’s sacrifice of his daughter for the proper winds to sail to Troy. With the adoption of coins in the Greek world circa 500 BCE, money began to replace the barter system in the Western world.
Bartering even extended into the early history of America when colonists sometimes paid debts in commodities. After war times when paper currency had little value, the bartering system often re-emerged. Many American physicians have continued to accept payment in goods in addition to cash to the present day, in rural areas and from insular communities such as the Amish. For the average person, bartering can be as simple as exchanging a day’s worth of moving assistance for an unwanted appliance.
Benefits and Limitations of Bartering
Barter exchanges have become more prominent as interest in the practice has grown. In such an exchange, a business is paid for goods or services in exchange credits. These credits can be redeemed for goods or services from other members of the exchange as needed. Such an operation can overcome one of the limitations of bartering, when one of the two parties neither needs nor desires the services or goods of the other, or has no need of them immediately.
For service industries, such as healthcare or consulting, a bartering system can generate income with otherwise unprofitable time. Empty slots can be filled with clients who cannot pay with cash but can pay with services; if the services are not needed, credits from an exchange can be awarded. For those who are falling behind on bills, offering services in lieu of money can prevent a debt from falling into delinquency and so preserve credit standing for the future.
While benefits exist, limitations are also present. Without the assistance of a barter exchange or other platform, receiving a desired service can be difficult as the environment is typically local. In unregulated bartering, neither party can be certain of receiving the promised payment. Fair market value may be difficult to determine, as some bartered commodities do not maintain fixed prices.
Exchanging goods presents a further problem, perishability. If a product with a short shelf life is not bartered quickly, it will degrade or rot and thus lose its value. Consumer goods such as electronics do not rot, but their value suffers from the effects of rapid technological development. A two year-old computer may hold far less value than a trading partner requires, even if he has need of one.
The Legality and Tax Implications of Bartering
Bartering may remain something of an anomaly in the modern economy, but it is an old and legal practice. The United States tax code considers bartering an alternative type of a cash transaction, and therefore income.
When individuals exchange goods already in their possession, no reporting is needed if the goods are of equal value since there is no profit. If a good such as a book or piece of art is later discovered to be more valuable, any profit from its sale must be reported as a capital gain.
Bartering is a way to bulk up income by creating business which would otherwise not exist, but it is not a method for concealing income from the IRS. The fair market value of a business’s bartered good or service is subject to the filer’s normal taxes. Whether the exchange is from a business to an individual consumer or another business, the market value for the commodity the business exchanged must be marked in the financial records.
When barter occurs in a direct transaction from a business to an individual or another business, all business income derived is reported precisely as other business income. It is submitted on the same forms, with the same deductions and requirements as any cash transaction.
For filing purposes, any transactions performed through a barter exchange must be reported on the 1099-B form; a reputable exchange will submit a copy to the IRS and the individual or business. If a business performs more than $600 per year of bartered services for any business other than a corporation, the 1099-MISC form is required.
As with most tax situations, caution is wise. If the filing will be exceedingly complicated, CPA or an attorney specializing in tax law is the best advisor.
Websites that Offer Bartering
Just as the Internet revolutionized shopping, the Internet has changed the bartering world. Barter exchanges have long provided trading environments, but a variety of websites now allow consumers and business to interact on a one-to-one basis. Websites such as barterquest.com, u-exchange.com, tradeaway.com, swap.com, and itex.com have platforms on which items or services can be offered. Others list the use of real estate and specific business services while others restrict their listings to smaller consumer items such as books and cds. Others allow advertising for both sectors. Sites better known for allowing individuals to sell items, such as craigslist.org, have sections set aside for bartering.
Many websites have neither a listing fee nor a commission, but others do. This may be a flat rate per trade, a monthly membership charge, or a percentage based on the value of the transaction. Before commencing with a trade, be certain of the site’s regulations.
Tips, Guidelines, and Cautions for Bartering
As with any form of commerce, bartering comes with its own guidelines and precautions. Be firm in any negotiations, particularly if the value offered is unreasonable. As the fair market value of a service or good will be considered one’s own income, accepting less than this value is to one’s detriment. If a fair agreement cannot be brokered, be prepared to walk away from the transaction. So long as the second person or business knows the transaction is certain, there is no incentive for negotiation.
Once the terms have been finalized, place the specifics in writing. If an agreement if initially brokered through email, set the terms in another printed document. As a written contract, it is both enforceable and verifiable. Oral contracts or agreements via email are just as binding, but either can be authenticated. If the trading partner fails to complete the transaction, he or she can be taken to court for breach of contract if a written agreement can be provided as evidence
If entering a barter exchange, survey the other businesses if possible. A barter exchange is not useful if the services available from other members are not needed. Be cautious about building a reserve of exchange credits. Some barter exchanges have existed for decades, but many are new. If an exchange folds, redeeming credits will be difficult or impossible.
Above all else, common sense must prevail. If a contract sounds too good to be true, it probably is. Since the exchange is identical to paying via cash, treat the transaction likewise. When bartering with a business, verify its standing with the Better Business Bureau or search the Internet for consumer reviews.
In the current sluggish economy, bartering has enormous potential to both expand business and stretch budgets. By proceeding cautiously and documenting transactions carefully, bartering will not only be a new means of trade but a profitable one as well.
Bartering article sources
online.wsj.com: Barter for the Services You Need
npr.org: Bartering Gains Steam
npr.org: Bartering Makes A Comeback Amid Tight Times
washingtontimes.com: Barter System Reborn
time.com: Bartering: Have Hotel, Need Haircut
online.wsj.com: Let’s Make a Deal
irs.gov: Tax Requirements for Barter Exchanges
irs.gov: Bartering Income
pbs.org: The History of Money
online.wsj.com: Trade You a Laptop? Online Sites Promote the Art of the Barter
online.wsj.com: Web Barterer’s Tricks of the Trade
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