Bartering is essentially a trade between two individuals which involves the exchanges of goods or services. Bartering typically does not involve the change of any money between the two parties.
Bartering is likely one of the oldest types of economic activity. It was used even before the invention of money for currency.
Instead, the parties use the value of the goods or services in order to arrive at their bargained-for exchange. Bartered goods and services typically fall under the scope of contract law.
Because of this, each party is obligated to perform their portion of the exchange. In addition, any items or services which are obtained using bartering must also be reported on each party’s income tax returns.
Common examples of bartering may include, but are not limited to:
- Goods for goods: For example, one party trades a book for another party’s hat;
- Goods for services: For example, one party trades tires for four hours of babysitting; and
- Services for services: For example, one party will mow the other party’s law if the other party will clean their pool.
As previously noted, usually no money is exchanged between the parties. In some cases, however, a party may offer money if a significant difference exists between the value of the items which are exchanged.
In some cases, a bartering agreement functions as a binding legal contract.
When is Bartering Used?
Bartering usually occurs in an informal setting between individuals who already know one another. Some individuals, however, choose to join professional bartering exchanges, or networks, to engage in high-level corporate bartering.
A bartering exchange often functions like a small economy, which is complete with its own form of currency. In addition, bartering is a common way for parties to resolve legal disputes.
For example, with an out-of-court settlement, a defendant may attempt to pay for the damages by bartering with their goods or services instead of money.
Are Barter Deals Contracts?
In most cases, a barter deal will meet all of the legal requirements for a binding contract, including offer and acceptance, consideration, etc. This is especially true in cases where the agreement creates obligations or legal duties for both of the parties.
In order to create a valid contract, each party is typically required to render something of value in exchange for another something of value. Suppose then that the parties agree that one of them will trade a vehicle for a boat.
If one of the parties delivers the vehicle but the other party does not deliver the boat, the non-delivering party may be legally required, by a lawsuit, to uphold their end of the agreement. Even in cases where the agreement was not recorded in writing, a court may find that the parties made an oral contract with their oral agreement.
Because of this, it is essential for the parties to record their agreement in writing, especially in cases where they suspect a dispute may arise. Written contracts are highly recommended if the value of the exchange of goods or services exceeds $1,000.
In addition, because a barter agreement is required to conform to contract laws, an individual should not engage in bartering if they suspect that the services are illegal or that the goods are stolen.
What is a Barter Exchange Network?
Barter exchange networks, which may also be known simply as barter exchanges, are organizations whose purpose is to facilitate bartering between numerous different parties. These networks may be aimed at the exchange of specific items of personal property, such as, for example, furniture barter exchanges.
Barter exchanges may also, on the other hand, consist of many different types of products which are being exchanged. Barter networks can also focus on the exchange of corporate resources or other types of complex, high-level assets.
Membership in barter exchanges typically requires a registration as well as payment of a fee. In some cases, brokers and appraisers are hired by overseers of the exchange in order to determine the value of goods or services which are being traded.
Instead of trading for money, the members of a barter exchange may trade goods and services with one another. Sometimes, barter exchanges will assign their members trading credits, depending upon the value of their foods and services.
Trading credits are similar to store credits in retail stores. These credits function as though they are money.
Members can exchange trading credits and then use those credits for future transactions. Barter exchanges make profits by charging transaction fees which are typically 10-15% of the value of the exchanges.
What are the Advantages and Disadvantages of Joining a Barter Exchange?
Bartering exchanges are becoming more popular especially in situations where market conditions make traditional currencies unstable. There are numerous advantages and drawbacks to working with barter exchanges.
Advantages of working with barter exchanges include:
- An increase in networking as well as product exposure: A bartering exchange effectively creates new markets for individuals who are looking to trade specific goods or services;
- Freedom to negotiate: Members of a bartering exchange network may adjust the price or value of their asset in order to obtain more a favorable exchange;
- New clients: Bartering networks often create new clients- the exchanges are typically not “one-time deals” and can involve repeat exchanges with interested parties; and
- Novelty: Many individuals find bartering to be an enjoyable and profitable activity. Some individuals consider bartering as a return to “more simple economic roots”.
Some of the disadvantages of working with barter exchanges include:
- Large membership fees: Membership fees may range from $200 to over $1,000 for a bartering exchange, depending on the nature of the goods or services involved;
- Transaction fees: Most barter exchanges will charge their members a transaction fee of 10-15% of the value of the exchange;
- Difficulty determining value: In most trade situations, determining the exact value of the good or a service may be difficult;
- Monitoring and supervising issues: Many barter exchanges can be difficult to supervise, especially when it comes to setting price rates; and
- Using trading credits: If a barter exchange only uses trading credits, those credits can only be used with that particular barter exchange organization.
Internet barter exchanges are also becoming increasingly more popular. These are exchanges which are conducted using the internet. These types of exchanges are gaining popularity due to their low membership fee rates as well as the availability of difficult-to-find products.
What Are the Tax Implications for Goods or Services Obtained in Bartering?
Because bartering is considered to be trading, an individual is required to report the fair market value of the goods or services in the income tax return. If a business is engaging in bartering, it is required to make reports of profits from bartering in its federal and state tax return forms.
Should I Contact a Lawyer about a Barter Exchange?
A bartering exchange can be an advantageous alternative for individuals who are seeking to engage in trading. If you are considering joining a barter exchange, it may be helpful to consult with an attorney first.
If you are going to be drafting any type of a barter agreement, a commercial lawyer can help you finalize the terms in a valid legal contract. In addition, a dispute which arises involving bartered-for items may require the attention of a lawyer.