Why Join a Bartering Club?

Have you ever wondered how people profit from bartering? So-called “cashless trading” seems like a wash, a no-gain-no-loss, even-steven deal.

The truth is this: joining a barter club can be a big boost for individuals and businesses who want to conserve cash and maximize their bottom line.

As soon as I found out that the IRS taxes barter transactions (and forces taxpayers to report every profitable deal we make), I figured there was no way to make bartering work for me or my small businesses.

But after researching the way barter clubs work, and seeing how hundreds of companies use bartering every single day, I decided to give the topic a second look.

The Bartering Facts

It turns out that bartering can be a win-win for anyone who gets involved in it, but you have to know the background, the tax strategies and how to find a reputable club.

Here are a few of the facts that helped me make bartering work for my family and my businesses:

  • What it is: Bartering, the trading of goods and services for other goods and services, was a booming trend in the 1970s as U.S. citizens hoped to take advantage of various tax loopholes. Those loopholes quickly dried up (as loopholes always do) when the IRS came out with very strict guidelines that put the brakes on the bartering market. Even so, barter clubs and associations continued to crop up as people recognized the advantage of exchanging their skills and assets on an informal market that did not use cash or credit as a means of exchange.
  • Super-fast transactions: Nowadays, members of barter clubs can use online listings to trade anything for just about anything else. Some of the organizations’ websites are so well designed that members can transact business at the click of a mouse and seal a barter deal in seconds.
  • Tax questions: Most every question you can come up with about how bartering is taxed can be answered in IRS Publication 525, but to make a long story short: the government wants a piece of the action whenever two parties exchange anything. There are a few (very few) exceptions, like doing yard work and watering your neighbor’s plants while she’s away on a trip, in exchange for her doing the same for you when you’re gone.

The main thing to remember is that the IRS looks at bartering “as if” the transaction were done in cash. So if you trade $500 of house painting services to your friend for $500 worth of car repair services, you would treat that transaction, for tax purposes, as if you received $500 in income from your friend, and then went out and paid $500 to have your car repaired at a shop. In this hypothetical case, you must report $500 of income. Since car repair expenses aren’t usually deductible for individuals, that side of the transaction wouldn’t be reported. Bottom line: You end up with a $500 gain as “other income.” But, if that car was used for your business, you could deduct the repair expense on your Schedule C or business return (whether it’s a 1065, 1120 or 1120-S form). Lesson learned: Read Pub 525 and/or consult your tax pro before entering into a large barter transaction.

  • The best barter clubs: There are lots of barter clubs out there, but the best-known one, even though it doesn’t call itself that, is Craigslist. Since its inception, CL has been the go-to place for barter fans who have goods and services they want to exchange. The only downside is you have to find a specific trader who wants to work with you. The more formal barter clubs, like Barter of America and others listed below, let members accumulate “barter dollars” that can be exchanged later for other goods and services. Yes, this is just like cash, but it lets you unload tons of unwanted merchandise very quickly, build up an account, and then “buy” things with barter credits later on, when you need or want something that pops up on the board. By the way, the IRS views all barter dollars as if they are real dollars, and the clubs will issue you a 1099-B form at the end of the year with our total “earnings.”

Besides Craigslist and Barter of America, U-Exchange/Barter USA (www.u-exchange.com/barterusa) is another popular club, but unlike the others it is merely a gigantic listing service based on states and goods/services categories. At U-Exchange, there are no fees, commissions or “barter dollars” because members deal directly with each other. Finally, another of the big networks is Barter Only (www.barteronly.com).  

  • For businesses and individuals: Companies that are strapped for cash, or bogged down with inventory can use bartering to get through tough times, clear out the warehouse, and acquire much-needed services or new machinery. Individuals can unload all sorts of household junk and appliances to build up barter credits and acquire new things they really need. Remember, selling personal, so-called “garage sale items” is almost never a taxable event because you are selling (or bartering) them for less than their original value. For individuals, it’s almost always easier to get rid of books, appliances and other household stuff on a barter site than on Amazon or eBay, where you are forced to find a cash buyer for everything you sell.
  • Bartering is big business: According to Barter News Weekly (barternewsweekly.com), there are more than a half-million corporate barter members in clubs around the world, while about 33 percent of U.S. companies already take part in some type of barter transaction each year. In fact, about two-thirds of all Fortune 500 firms use barter as one way to transact business!
  • Know before you join: Individuals who want to join barter clubs should note that many organizations will require them to register as a “barter business” rather than an individual taxpayer. The IRS taxes profitable barter transactions, which must be reported using a 1099-B official form. All IRS barter rules take into account the “fair market value” of the goods and services exchanged.
  • Registration: One of the largest bartering organizations on earth, Barter of America (barterofamerica.com), requires that new members register as “barter businesses.” The club’s full list of rules, which are similar to many other barter club’s regulations, are listed on the Barter of America website.
  • Due diligence: Before getting involved in bartering, be sure to investigate different organizations and make a selection based on membership fees, rules, and ease of exchange. Generally speaking, large barter clubs have a huge advantage over smaller ones because of their vast base of members with worthwhile services and goods to offer.

What are your barter experiences?

If you find a barter organization that works for you, please let us know about it in the comments section and on our Facebook page. Owners of bartering websites are also invited to share information about the industry and how to make the most of cashless business.

Bartering can be a smart, outside-the-box way to do business. That might be why it is becoming a standard way for small businesses and savvy individuals to exchange goods and services.

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