The IRS officially taxes income of any kind, which includes bartering income.
How exactly does this work? If you are a farmer and trade cotton for your neighbor’s potatoes,
and
The IRS will never know unless you habitually make public offers to barter, run a bartering center, and so on.
You report it as income based on the value of the goods you recieved, minus your costs to produce your goods. If you have over a certain amount of such income (I think it is $400) you are required to file a Schedule C.
Note that these aren’t unique to barter transactions-they are also issues with cash transactions.
As to 1) there’s no “automatic report” that tells the IRS that someone sold a tomato from her garden to her neighbor for cash, either–the mechanism for the IRS finding out about a cash or a barter transaction is her legal obligation to report any income received on her tax return.
Similarly, as to 2) in general terms individuals can deduct the costs incurred in pursuing activities pursued for profit (the theory is that allowing the deduction gives a more accurate calculation of the income the transaction gives her). Hence, any deduction of expenses would be equally available in a barter or in a cash transaction.
IANAL/none of this purports to be or is tax advice of any kind whatsoever, and should not be relied upon by any person for any reason as a statement of or advice on U.S. tax law.
Let’s say that I conduct all of my business via barter. I trade my cotton not only for my neighbor’s potatoes, but also for milk from my neighbor on the other side, tools from the blacksmith in town, etc. And let’s suppose that I also don’t want to defraud Uncle Same, so I dutifully calculate all of the costs and values, and figure out how much tax I owe.
Now what? Since I conduct all of my business by barter, I don’t have any money. Can I pay my taxes in bales of cotton?
My understanding is that you cannot–but I’m not a tax expert.
Presumably, if at the end of the day the hypothetical farmer never pays his taxes, the IRS will go to court, get a lien on his land/cotton, and then foreclose-selling it at tax auction–so that (eventually) somebody’s going to sell the cotton for cash to pay the tax, and the question is who, when, in what setting, and whether there will be penalties and interest due on the tax.
Probably not, you should barter with someone and trade the bales of cotton for bales of currency, and use that to pay the IRS.
Yes, the IRS will only accept payment in US currency. If you conduct all your business in barter and have no US currency then you’re in the same situation as someone who gets all his income in US currency but unfortunately spends it all before April 15th and has no money to pay the IRS.
The answer is that you have to obtain US currency in some fashion. If you conduct all your business in barter you should be familiar with the problem that while you may have a surplus of some goods and a need for other goods, the person who has a surplus of the goods you need might not have a need for the goods you have a surplus of. So you arrange with a third party who does.
Therefore, you must exchange your bales of cotton for a particular form of good known as “money” and use the money to discharge your obligation to the IRS.
Bottom line, you have a legal obligation to pay taxes on cash income or barter/in-kind income. It happens to be true that it is sometimes very difficult for the IRS to be able to discover cash or barter income and therefore it is much easier to illegally evade paying your taxes if you conduct all transactions in cash and barter. But the IRS does have some methods of untangling this as Al Capone discovered.
One pet peeve here–the IRS doesn’t “officially” tax anything.
Congress chooses what to impose a tax on by creating and amending the federal laws that make up the tax code.
The IRS then administers, enforces, and when appropriate, interprets the tax code, but it doesn’t get to choose what is or isn’t taxed in the way this seems to suggest it does.