When transferring money between two parties, under what circumstances is it considered taxable income?

Question

According to this question, a 0% loan may not be legally considered a 'loan', but a 'gift', which is taxable.

When attempting to research it I came across this; According to the IRS: You are required to pay taxes on "the fair market value of goods or services received from bartering", however businesses are allowed to deduct "certain costs you incur to perform services that you barter."

This raised several scenarios/questions in my mind, that are all related to the original question.

If you trade for something of equal value, is that considered income? It seems like the answer is yes. The IRS says you must pay taxes on the 'value of goods or services received', not on the net value. So if you and a friend decide to swap otherwise identical bicycles because you liked the other's color, are you both required to pay taxes on the value of the bicycle.

If you borrow a small amount of money for a short time, is that considered income? For example you left your wallet at the office while out at lunch so a friend loans you $10 to pay for lunch until you get back to the office where you can pay him back.

What about the previous scenario in reverse, does the friend have to pay taxes when they get back their $10?

Do you have to pay taxes if you are paid back in a different format than originally paid? For example, a coworker buys lunch and you pay them with something denominated in paypal/google wallet/etc. By the end of the year, this coworker may have hundreds of dollars in their account.

I know the logical answer to these is 'No' because no one is making money, so there's no net income. However my question exists because for all other income, you are required to pay taxes on the gross amount, regardless of how/what you spend it on (deductions notwithstanding), and way the IRS describes barter makes it sound like you are required to pay taxes on the gross value of what you received, not the net value.

Thank you for reading.

Answer 1

A loan is not a taxable income. Neither is a gift.

Loans are repaid with interest. The interest is taxable income to the lender, and may or may not be deductible to the borrower, depending on how the loan proceeds were used.

Gifts are taxable to the donor (the person giving the gift) under the gift tax, they're not a taxable income to the recipient. Some gifts are exempt or excluded from gift tax (there's the annual exemption limit, lifetime exclusion which is correlated to the estate tax, various specific purpose gifts or transfers between spouses are exempt in general).

If you trade for something of equal value, is that considered income?

Yes. Sale proceeds are taxable income, however your basis in the item sold is deductible from it.

If you borrow a small amount of money for a short time, is that considered income?

See above. Loan proceeds are not income.

does the friend have to pay taxes when they get back their $10?

No, repayment of the loan is not taxable income. Interest on it is.

Do you have to pay taxes if you are paid back in a different format than originally paid?

Form of payment doesn't matter. Barter trade doesn't affect the tax liability. The friend sold you lunches and you paid for them. The friend can deduct the cost of the lunches from the proceeds. What's left - is taxable income. Everything is translated to the functional currency at the fair market value at the time of the trade.

you are required to pay taxes on the gross amount

Very rarely taxes apply to gross income. Definitely not the US Federal Income taxes for individuals. An example of an exception would be the California LLC taxes. The State of California taxes LLCs under its jurisdiction on gross proceeds, regardless of the actual net income. This is very uncommon.

However, the IRC (the US Federal Tax Code) is basically "everything is taxable except what's not", and the cost of generating income is one of the "what's not". That is why you can deduct the basis of the asset from your gross proceeds when you sell stuff and only pay taxes on the net difference.