Table of Contents
- 1 When is a Local Currency or Exchange Network Considered a “Barter Exchange?”
- 2 Proposal to Amend Barter Exchange Reporting Requirements
- 3 Taxation of Barter, Generally
- 4 Other Barter Exchange Info
- 5 Footnotes
When is a Local Currency or Exchange Network Considered a “Barter Exchange?”
See footnote for acknowledgements 1
It is very important to determine whether an online currency or other exchange network would be considered by the IRS to be a “barter exchange.” According to Treasury Regulation 1.6045-1, a “barter exchange” is:
“any person2 with members or clients that contract either with each other or with such person to trade or barter property or services either directly or through such person. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis.”3
The regulation provides some examples to illustrate what is included in this definition of “barter exchange:”
A, B, and C belong to a carpool in which they commute to and from work. Every third day, each member of the carpool provides transportation for the other two members. Because the carpool arrangement provides solely for the informal exchange of similar services on a noncommercial basis, the carpool is not a barter exchange . . . .
X is an organization whose members include retail merchants, wholesale merchants, and persons in the trade or business of performing services. X’s members exchange property and services among themselves using credits on the books of X as a medium of exchange. Each exchange through X is reflected on the books of X by crediting the account of the member providing property or services and debiting the account of the member receiving such property or services. X also provides information to its members concerning property and services available for exchange through X. X charges its members a commission on each transaction in which credits on its books are used as a medium of exchange. X is a barter exchange . . . .4
The IRS is concerned that barter exchanges provide an opportunity for tax avoidance, so an organization that falls within the definition of a barter exchange is required to report to the IRS regarding the transactions of its members.
Are community/local currencies also barter exchanges?
Unfortunately, it is difficult to determine whether complementary currencies would be considered barter exchanges and therefore subject to these requirements. The IRS has determined in several private letter rulings that an informal, non-commercial time dollar program is not a barter exchange. These private letter rulings indicated that it was significant that the medium of exchange was not easily convertible to U.S. Dollars.5 The IRS also considered the existence of contractual liabilities between members and the organization or among members. For example, in P.L.R. 9608009, the IRS acknowledge that the exchange operated on a “noncommercial basis” because members did not have a “contractual right to receive any services from [the organization] or [the organization’s] members,” among other reasons.6
There is one example of a private letter ruling that found a different kind of complementary currency system did not fall within the definition of a barter exchange. In a private letter ruling,7 the IRS found that an “electronic cash exchange system” was not a barter exchange. The system involved the storing and transferring of electronic cash on a card. The stored value could be transferred from card to card by consumers and retailers in exchange for goods and services. One unit of value on the card is equal to one U.S. dollar and is sold to participants in exchange for cash. The amount of money that may be stored on any card is expected initially to be limited to between $100 and $1,000. Members have the right to sell their cards back to the issuer at face value at any time.
Of course, private letter rulings cannot be relied upon as precedent. Local currency systems will be on the safe side if they assume that they fall within the definition of a barter exchange, or seek a letter ruling from the IRS to the contrary (a very expensive process).
Tax Reporting Requirements for “Barter Exchanges”
Barter exchange tax reporting requirements are listed in Treasury Regulation 1.6045-1 (26 C.F.R. § 1.6045-1). Barter exchanges must report:
“exchanges of personal property or services made through the exchange among its members or between these persons and the barter exchange.”8
“For this purpose, property or services are exchanged through a barter exchange if payment for property or services is made by means of
(1) a credit on the books of the barter exchange or
(2) scrip issued by the barter exchange or
(3) if the barter exchange arranges a direct exchange of property or services among its members or clients, or exchanges property or services with a member or client.”9
How to report
Currently, the IRS requires barter exchanges, through which there are 100 or more domestic exchanges of more than $1.00 each during the calendar year, to file an information return each calendar year.10 The barter exchange must file a 1099-B for each transaction involving a member or client that is not a corporate member or client. The Form 1099-B for non-corporate members must include the following:11 name, address, and taxpayer identification number of each member providing property or services in the exchange, the property or services provided, the amount received by the member for the property or services, the date on which the exchange occurred, and other information required by the form.12 Each transaction must be reported on a separate Form 1099-B.13
The regulation provides an exception for transactions involving corporate members and clients, allowing the barter exchange to report a single 1099-B with the aggregate transaction amount received by the corporate member or client.14 The Form 1099-B for corporate members for clients must report the name, address, and taxpayer identification number of the corporate member, the aggregate amount received by the corporate member during the reporting period for property or services provided by such corporate member, and such other information as may be required by the form.15 Thus, for corporate members, transactions may be reported on an aggregate basis rather than reporting each individual transaction.
The barter exchange must also file Form 1096, “Annual Summary and Transmittal of U.S. Information Returns,” with each set of 1099-B forms.16 Form 1096 is merely an informational item that must accompany the Form 1099-B for each transaction.
If a barter exchange is required to file 250 or more returns of one type (i.e. 250 1099-B forms), it must file Form 1096 and all related Form 1099-Bs electronically.17
When to report
The barter exchange must furnish a copy of Form 1096 and Copy A of all accompanying Form 1099-Bs to the IRS by March 2nd of the year following the calendar year in which the transactions took place.18
The barter exchange must furnish Copy B of all Form 1099-Bs to its member recipients by February 17th of the year following the calendar year in which the transactions took place.19
Proposal to Amend Barter Exchange Reporting Requirements
SELC finds that the current reporting regulations under section 1.6045-1 are overly burdensome on community currency organizations that are regulated as barter exchanges. As such, we are proposing that the IRS amend the regulation to eliminate transactional reporting and allow for aggregate reporting, instead, for all members or clients. Please see this memo for more information and for the draft amendment as proposed by SELC.
Taxation of Barter, Generally
See the Income Tax page for general information on the taxation of barter income.
Other Barter Exchange Info
- This section was written by Jenny Kassan, with the assistance of Jose Rivera, a student at Harvard Law School. SELC Attorney Neil Thapar wrote the section on changing the reporting requirements for barter exchanges. ↩
- Note that when the IRS says “person,” they also mean corporation or association. ↩
- 26 C.F.R. § 1.6045–1(a)(4). ↩
- 26 C.F.R. § 1.6045–1(b). ↩
- See I.R.S. P.L.R. 200724006 (June 15, 2007) (holding that the exchange operated on a “noncommercial basis” because credits were valued “without regard to the type of service,” among other reasons); I.R.S. P.L.R. 9608009 (Feb. 23, 1996) (holding that the exchange operated on a “noncommercial basis” because credits were allocated “without regard to the type of service,” credits were not freely transferrable, and records showed “significant disparities” between the credits received and credits spent, among other reasons); I.R.S. P.L.R. 8536060 (June 12, 1985) (holding that the exchange operated on a “noncommercial basis” because credits “have no monetary value,” among other reasons). ↩
- P.L.R. 9608009 (Feb. 23, 1996); See also P.L.R. 8536060 (holding that the exchange operated on a “noncommercial basis” because “service recipients did not incur a contractual liability upon receipt of services under the program,” among other reasons.). ↩
- P.L.R. 9743047 (October 24, 1997). ↩
- 26 C.F.R. § 1.6045–1(e)(2)(i). ↩
- 26 C.F.R. § 1.6045–1(e)(2)(i). ↩
- 26 C.F.R. § 1.6045-1(e)(2). ↩
- 26 C.F.R. § 1.6045-1(f)(2)(i). ↩
- 26 C.F.R. § 1.6045–1(f)(2)(i). ↩
- Form 1099-B instructions p. 5. ↩
- 26 C.F.R. § 1.6045-1(f)(2)(ii). ↩
- 26 C.F.R. § 1.6045–1(f)(2)(ii). ↩
- 26 C.F.R. § 1.6045-1(f)(1). ↩
- Form 1099-B instructions p. 5. ↩
- Form 1096 instructions p. 1; see also Form 1099-B instructions p. 7. ↩
- Form 1099-B instruction p. 7. ↩