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.