Barter exchanges can be instrumental in preserving cash, increasing profitability and maintaining healthy levels of liquidity
In 1982, the IRS recognized barter-the trading of one product or service for another-as a legal tender.
Why is this important for small businesses?
Barter exchanges can provide small business with unique growth opportunities due to its $20 billion size and over 470,000 participating businesses in the United States alone. The industry of barter is perhaps the oldest in history, dating back thousands of years. Most business owners understand barter in a direct trading capacity, that is, the trading between two people who need goods or services from each other.
Barter exchanges, which range from hundreds to thousands of members, enable trading to occur in an indirect manner. Members of the barter exchange can buy goods from any member with a virtual currency. This virtual currency, “Barter Dollars” or “Trade Dollars”, is earned by either performing services or selling product to other members.
Barter/Trade dollars are valued in U.S. currency for the purpose of information returns and allow barter to take place between parties when one party may not have a simultaneous need for the goods or services of other members. Various barter exchanges also offer lines of credit to its members that allow members to obtain or buy goods without having to initially earn barter dollars through sales. However, unlike person to person bartering, members of exchanges are not under any obligation to barter or purchase directly from a seller.
Instead, when a member sells a product or a service to another member, their barter account is credited for the fair market value of the sale. When a barter exchange member purchases a product or service, the account is debited for the fair market value of the purchase
Barter exchanges act as a third party bookkeeper by keeping track of trade dollars that participants accumulate. Earning trade or barter dollars through a barter exchange is considered taxable income, just as if a product or service was sold for cash, therefore barter exchanges issue a 1099B to its members that have earned trade or barter dollars through sales to other members of the exchange.
About the author
Alexander J. Hart of Cuban American decent is principal and founder of Hart Vida Raffo. With over 25 years of experience, Alex specializes in the areas of tax strategy and planning, business process improvement, and capital consulting. Whether advising on capital and financing strategy or consulting for privately-held professional services firms, Alex has the expertise and practical know-how to help any company optimize their business processes and make tactical financial decisions. He began his career at IBM in sales operations and accounting. He was a Controller for the N.Y. Post, has been a CFO for a medical device company, and has written a tax column called “Ask the Tax Guys” for Micro-Cap Review. Alex is a professional member of A.L.T.A. (Affiliated Lawyers of the Americas), a member of the National Association of Tax Preparers, and is a contributing author and mentor at Latin Business Today. Alex graduated from St. John’s University with a B.A. in Spanish and his M.B.A. in Finance. He obtained his accounting degree from Pace University.Website