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I was reading an answer over on Law.SE, and it made me wonder about how the IRS calculates tax on barter transactions.

Lets say that I do a job in January, and get paid for my work with 20 goats and when I received the payment, goats were worth about $100 each.

Later that year, in October, I do another job of about the same value, but this time I get paid with 5 goats. The goat market has gone absolutely crazy and they are now worth about $400 a head.

In December, the goat bubble officially popped, and they're down to $20 each. I didn't earn any goats in December, but this market downturn might be important.

So, for the year, my taxable income was 25 goats. How would I, or more importantly, how would the IRS allow me to calculate taxes on my earnings? Would I have to prove the market value of the goat when I received payment? Can I claim that I only earned 25 * $20 since that's what the goats are worth now?

Note: Assume that this small income is taxable as if I just made $50k/year. I realize that with such a small earning taxes wouldn't normally be due and I'd be living in poverty with my goats, but that's not a part of my question.

  • 19
    Goat Bubble ... – aslum Nov 28 '17 at 18:16
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    About the answers below, if we're really talking about 'bitcoin' and not 'goats' keep in mind the IRS treats bitcoins very similar to securities and not currencies, commodities, or some other good and the answers below do not apply. – Chuu Nov 28 '17 at 20:24
  • @Chuu A comment on the linked question said that Bitcoin was considered property rather than currency, so I thought it would be closer to Goats than to Euros or Pounds, etc. – JPhi1618 Nov 28 '17 at 20:26
  • The exact tax laws that apply to bitcoin deserve their own question. If that really is what we're talking about ask a question about bitcoin directly. – Chuu Nov 28 '17 at 20:28
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    @Chuu, I was genuinely more concerned with barter because I have done that in the past. I've haven't jumped on the Bitcoin train. – JPhi1618 Nov 28 '17 at 20:29
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Replace goats with a foreign currency, or in fact any product with a market value, and it becomes self evident.

As far as your Tax office is concerned it's the dollar value at that point in time. This is why if you do carry out work which gets paid in other currencies you need to record the exchange rate / value in home currency at the point of exchange.

Sadly this means you cannot ride the goat bubble to avoid goat tax...

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    Thanks, that's the part that wasn't evident to me - the part when the valuation is captured. In an unregulated and unrecorded market such as goats, or any other item that can be bartered, would they just have to take your word for it on the exchange rate? – JPhi1618 Nov 28 '17 at 16:15
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    It may not be heavily regulated, but you can guarantee the local auction mart will have valuations for livestock daily... – Rory Alsop Nov 28 '17 at 16:16
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    Any gain or loss in goat value after you've received them is considered a capital gain or loss. – stannius Nov 28 '17 at 17:32
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    @stannius ...but only if and when you so choose to liquidate the goats – J... Nov 28 '17 at 18:04
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    @RoryAlsop Unlike a foreign currency, however, there isn't a GOATEX around to provide an unambiguous definition of fair market value. The unspoken part of this question might be interpreted to be asking how fair market value is determined for commodities that are not broadly exchanged on open markets. – J... Nov 28 '17 at 18:16
7

Essentially IRS sees this as 2 transactions.

One you received USD 100.
Second you purchased goats for USD 100.

So on first transaction you know what is your tax obligations.

If you sell goats and make profit or loss, this depends on IRS ruling on live stock.

If you replace goat with shares, real estate, bullion, there will be capital gains or loss that can be applicable on second transaction.

If you replace goat with car, consumer goods, there is no tax implications on second transaction.

  • If a car goes up in value you are required to pay taxes on the gain. – stannius Nov 28 '17 at 18:46
  • If you treat the goat like a pet, and it goes down in value, I guess probably you wouldn't be able to deduct the loss? But if it goes up in value the gain would be taxable. – stannius Nov 28 '17 at 18:49
  • Ie, the fallacies of an income tax. – enorl76 Nov 28 '17 at 18:58
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    @stannius Only if you "realized a gain" (i.e. sold the goat for USD). Similarly a loss would only be deductible if you sold the goat at a loss too. – Dai Nov 28 '17 at 21:17
  • @stannius generally the value of car don't go up. Unless what you have is a collectibles... It is then classified differently. – Dheer Nov 29 '17 at 0:26

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