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Say Alice writes Bob a computer program, and in exchange, Bob remodels Alice's house. If they were charging money instead of bartering services, either of them would have charged several thousand dollars for their service.

What sorts of tax implications does this transaction have? Do Alice and Bob have to figure out the fair market value of their services and report that as income or something?

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  • You have to accept the reality that, in western countries the "black" economy is staggeringly huge. The reality is in the vast majority - I would be inclined to say all - of such transactions, the whole raison d'etre is that Alice and Bob can absolutely not mention this to any national or state authorities. (What other possible reason would you do this other than to keep it off books? People who live in jurisdictions with no tax never do nonsense like this, they just use ordinary money, of course.)
    – Fattie
    Commented Jun 23, 2016 at 15:31
  • example, novaworkboard.wordpress.com/2013/09/13/…
    – Fattie
    Commented Jun 23, 2016 at 15:32

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It's called bartering and the IRS has a page titled Four Things to Know About Bartering. The summary is -

  • Organized barter exchanges
  • Barter income
  • Tax implications of bartering
  • How to report

The bottom line is this is taxable.

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Do Alice and Bob have to figure out the fair market value of their services and report that as income or something?

Yes, exactly that. See Topic 420.

Note that if the computer program is for Bob's business, Bob might be able to deduct it on his taxes. Similarly, if the remodeling is on Alice's business property, she might be able to deduct it. There might also be other tax advantages in certain circumstances.

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  • It looks like 1099-B is specifically for if you go through a type of organization called a barter exchange to conduct your barter; if you don't, you don't have to file form 1099-B, but 1099-MISC may be required. The Topic 420 link is quite helpful, as are the further links on that page.
    – user2357112
    Commented Jun 22, 2016 at 20:33

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