Baffled by barter transactions
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 Dear
Tax Talk,
About 35 years ago, I remember reading an article written by a professor of taxation which suggested that the IRS could stop couples from living out of wedlock. He pointed out that barter income is taxable income. He felt that without even any changes in tax law, the IRS could impute income to couples living out of wedlock. One member of the household may do the cooking while the other one does the cleaning. Is this a barter transaction? To the best of my knowledge, the IRS has never taken that position.
-- Wondering
Dear Wondering,
Bartering is an exchange of property or services. Before there was
currency, there was barter.
Although not specifically stated, the IRS only considers
bartering income to occur in commercial transactions. Under the
professor's scenario you describe, everybody would have barter income.
For example, if you help me clean out the garage and I let you keep
whatever you want, this results in income to you. Similarly, the
professor would be suggesting a nonmarried couple gains by having
one work and the other do the household chores. Supposedly the earner
would receive income equal to the value of the services rendered
and the homemaker would receive income in the form of food and lodging.
Well, the same could be said for a married couple since the two
gains would not offset on a joint return. I think the professor
from 35 years ago had too much time on his hands.
The IRS provides the following examples of barter transactions that would result in income. Note that they involve business settings.
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Barter transactions according to IRS: |
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Example 1. You are a self-employed attorney who performs legal services for a client, a small corporation. The corporation gives you shares of its stock as payment for your services. You must include the fair market value of the shares in your income. The corporation can deduct the value of the shares as legal fees. |
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Example 2. You own a small apartment building. In return for six months' rent-free use of an apartment, an artist gives you a work of art she created. You must report the fair market value of the artwork as rental income on Schedule E, Supplemental Income and Loss (Form 1040); the artist must report the fair rental value of the apartment as income on Schedule C or Schedule C-EZ (Form 1040). |
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