Here in the US, if you barter for goods and services [site]](http://www.allbusiness.com/accounting-reporting/corporate-taxes/1153-1.html) , it can be taxable. Why is this, since no money is changing hands?
It’s still a sale, and therefore subject to sales tax.
Otherwise, people would shift their transactions to barter simply to avoid the tax.
A couple of links to irs materials on bartering:
http://www.irs.gov/newsroom/article/0,,id=205581,00.html
http://www.irs.gov/businesses/small/article/0,,id=188095,00.html
http://www.irs.gov/businesses/small/article/0,,id=187920,00.html
Well what is money really? It’s just the ability to buy goods and services, right?
It may be a sale, but a sale not involving money. If you agree to fix my roof in exchange for me fixing your plumbing, no money exchanges hands between us.
And as for your second point, I thought about that, but consider this; in a lot of societies, bartering was the norm, until transactions became too complicated, and a lot of societies moved on to a cash economy. So it seems logical that if bartering became tax free, it would not have much of an impact on tax revenues, because, while there would be some people bartering where they could to avoid taxes, I don’t think that the American economy, as a whole, would revert back to the bartering system.
Sorry, being a layman in most matters, I sometimes tend to use the common meaning of words, instead of their dictionary definitions. When I say money, I’m using it as a synonym for cash, as in either government issued currency, or checks or credit that is drawn against government issued currency.
The point remains. Technically, barter is no different than a cash transaction. Cash is just a government-protected intermediary used to exchange goods and services.
It’s not just barter that’s taxed - it’s any new value, really. For example, you could paint yourself a painting, and if it is appraised as being worth $100,000, it could be taxable for that amount. If you finish your own basement in your home, your property value will go up, and the property tax with it.
There’s nothing in the tax code to say that the charge to tax applies only to transactions which are settled in cash, or in money. Why would there be?
In practice how often is this even worth looking at by the IRS?
I mean, they have millions and millions of under the table deals to hunt (The guy who pays in cash to have his car fixed up, the guy who pays in cash for someone to man the register, etc… etc…)
Honestly, at what level would they care?
Would they care that back home my dad would snowplow a few neighbor’s driveways in return of haircuts from the hairdresser across the street and some cords of wood from the guy down the road?
Or should I just shut up before I get a phone call asking why my parent’s door was just kicked in by IRS agents?
The IRS cares to the extent that if you’re audited and they see evidence of bartering, you’re going to get an assessment for the unpaid tax. In one case, someone got caught for bartering because they were stupid - they claimed the bartered item as an expense without claiming the income.
When people talk about bartering, they always assume that we’re talking trivial amounts among friends and that it’s no big deal. But there is the potential for a lot of abuse.
First of all, where do you draw the line on cash? Clearly dollar bills are cash and haircuts are not. But there are a lot of assets like gold, diamonds, stocks, bonds and other commodities that are readily sold on open markets at minimal cost. Even if a farmer trades you in a ton of wheat, you can easily sell that off. What if your insurance agent “trades” you a $1200 insurance policy?
Second, barter can be quite extensive. I do accounting for small businesses. My clients include shoe stores, clothing stores, insurance agents, restaurants, web designers, computer consultants, appliance retailers, landscapers, contractors, interior designers, housekeepers and more. If I wanted to, I could get virtually everything but groceries and banking services from my clients through barter. Let’s say I convert $40,000 a year of cash into barter and avoid paying about $15,000 in taxes. Will the IRS care? You bet.
Oh oh. Last night I posted a response, but I don’t see it now. Which either means that the board ate my post, or else I somehow accidentally posted it to another thread :eek:
Anyway, I’ll re-post my reply a little bit later.
Sure, the IRS neither knows, nor really cares if it’s an occasional freindly exchange of services, where no one is figuering exact exchange, etc.
But note there are “Bartering services” out there, where one accumulates “credits” by giving service and gets “credits” back, usually to an entirely different service provider.
So, let us say you are a roofer. And you repair a dentists roof. In return, he does work for a plumber. So then you can get some plumbing work done. And a couple of you will likely end up with “credits”
That’s just plain old income, and thus taxable.
I don’t know. I remember a few years ago, the story of Matt Murphy. He caught Barry Bonds’s 756 home-run ball, and it was said he might be on the hook to pay 35% of the ball’s estimated $400,000 to $600,000 value. But after much publicity and outrage, it came back that he would only have to pay taxes if he sold the ball.
Well, that’s an indirect consequence, but I see your point.
I’m not sure how to answer this question in a way suitable for GQ, and since I don’t want this thread being moved to IMHO or GD, I’m afraid I’ll have to decline answering that.
Well, if you sold it, you’d get taxed on it
I honestly can’t think of how something like that could work. That would be very complicated to accomplish.
I have to disagree with your use of the term, convert $40,000 of cash into barter. I mean, I see what you’re getting at, but if you did most of your transactions in barter instead of money, how could you come up with the money to pay taxes? Or, put another way, if you make $40,000 per year, you can take $15,000 out of it. When you barter, you may be receiving $40,000 per year in services (to use your example), but there is no cash to take out of that.
I was talking more about, direct one on one bartering, like, I’ll fix your roof if you unplug my drains. Or something like that. For something as complex as what you mention, I could probably see taxing it.
That’s fine, and I’m not trying to pick on you. You certainly don’t have to answer anything you don’t want to, but I am questioning my own judgment in leaving this thread in General Questions to begin with. Here is the OP:
What sort of factual answer did you expect? The factual answer is because that’s how the law works here. I suppose there is another factual answer, which is that your OP is based on a false premise–that we only tax transactions involving money–we don’t. We tax income. “You can receive income in the form of money, property, or services.” http://www.irs.gov/pub/irs-pdf/p525.pdf For example, noncash prizes are included in income. http://www.irs.gov/pub/irs-pdf/p17.pdf Therefore, the notion that income is the same as money is wrong. That’s why. Aside from that, we’re into a discussion of public policy about whether that definition is a good idea. That’s Great Debates territory.
I’ll leave this in General Questions for now because you seem to want to keep it here, but I really think it ought to go in Great Debates. To be clear, this isn’t a warning.
Gfactor
General Questions Moderator
I don’t think that a person has income for US federal income tax purposes when he paints himself a painting. If that were the case, then theoretically everyone would have to value everything they create and pay tax on it (whattaya think this post is worth?), which is absurd.
I guess I phrased that poorly. What I meant was, what is the government’s rational for taxing non-cash transactions?
That is an excellent point, and one I did not think of.
I was just trying to understand the logic behind taking money out of moneyless transactions. There have been some pretty good posts which have helped me to understand why.
Thank you. I’m pretty much done with this thread though. I got some good factual answers out of it.
Since the US income tax is a pay as you go system, wouldn’t you get dinged if you didn’t file estimated tax throughout the year?
It would be interesting the service aspect. Obviously it would be easy to put value on gold or wheat traded, but what about a haircut. Obviously a person with no retail experience cutting hair, would not be able to charge as much.
I still see morons paying $75.00 in these yuppie hair salons to get what amounts to a shaved head. You can go to Supercut for $10.00 or do it yourself for a shaved head.
In learning about the tax code, one of the things I realized is that almost none of it is about cash. There are whole sections of tax code that deal with nothing but property and stock transactions between partners/shareholders and companies. If you look at the financial world, you also realize that the richest and most powerful people in the world have very little cash.
I don’t know if it helps you to understand the situation from a different perspective, but if you look at the oldest tax codes, they taxed non-cash events and accepted payment in non-cash forms. For example, the idea of tithing 10% goes back to early Hebrew taxes in which 10% of grain harvests or 10% of livestock births were given to the temple (which was the government of the time).
Unlike modern systems, they taxed the production rather than a transfer for value. So a farmer today doesn’t pay 10% of the crop produced; he pays 30% of the increase in value (i.e. value obtained for the crop less the costs to produce it). He can hoard all the wheat he wants; he’s only taxed when he obtains something else of value.
Cash is obviously a key method for transferring value today, but to omit non-cash transactions would 1) be like taxing only the tip of the iceberg and 2) would actually penalize people who make cash transactions. Neither of those outcomes is desirable from the government’s perspective.
I guess I didn’t think about it from a historical perspective.
I’d say it’s worth about $0.02
IANATL, and none of this is tax advice but:
The discussion of the tax on a painting is conflating two concepts—basis and gain.
When I paint a painting, I have no gain. I just am not taxed. Painting a painting is tax-neutral. I don’t need to value anything. (if I’m in the business of painting, I can deduct my ordinary and necessary business expenses, but let’s assume I’m not).
I do have a painting.
When I sell that painting (for cash, in barter, etc, etc), then I have income. I’m taxed on that income–whether or not I am in the business of being a painter–just as if if I bought a painting, it gained value, and I sold it later.
Usually, if you buy a painting, you have basis in it—(basis is a tax concept for the amount you’ve invested in something–used to accurately calculate income). That means that when I sell it, I’m taxed on the amount it has gained value–the gain, rather than the sale price. This is because the amount I paid for it isn’t something I gained by selling the painting–I had it already. So when I buy a painting, I need to keep track of my basis in it, to be able to count any gain against it later.
Not accounting for basis leads to absurd results–For example, I buy a painting worth $100, it increases in value by 10%, and I sell it for $110. I’ve gained $10-- if I was taxed on the entire sale price, I’d have to pay about $38 in tax—almost four times my actual “income”. My income (the amount my wealth has increased) is the gain on the painting-$10, and so I pay about $3.60 in tax.
The IRS (correctly) concludes that individuals have zero basis in their own work–it’s a measure of monetary investment, not of effort (plus, on a practical level, nothing would be taxed if we counted “sweat equity” into basis–since it would be reasonable to value it at the price paid for it, i.e. income).
So when you paint a painting, you don’t need to value it now. You do need to pay tax on gain when it’s sold–and since you made it from (for all intents and purposes) valueless components, you have no basis in it, and are taxed on the entire sale price.