Barter

How to Barter, Give, and Get Stuff

There are things we do for money and things we do for free. And then there is everything in between. In that between-space, there is a growing and exciting world of barter, work exchange, gift circles, mutual aid societies, time banks,local currencies, and other modes of transacting that don't use regular money. These transactions form a huge component of the "sharing economy," the"third economy," the "sustainable economy," or whatever you may call this"new economy". 

I thought it would be a fun and important project to sort out the tax, business, and labor law implications of these "in between" transactions. However, when I got knee deep into the research, I found that things got rather soupy. 

Explaining legal concepts in an interesting and vivid way can be a challenge, which is why I've chosen to construct this article around a more familiar concept: soup. There are a couple ways of making soup that fit clearly into defined legal frameworks:

• Soup for Money: If I were to own a gourmet soup restaurant, the tax, business, and labor law questions are fairly straightforward. The income I make would be taxable and sales tax would apply (in most states). I would be subject to health and safety laws, permitting requirements, and other business regulations. The people who help out in my kitchen would be legally considered employees, and I would be obligated to pay them minimum wage, obtain workers compensation insurance, pay payroll taxes, and so on. 
• Soup for Me: On the other hand, when I make a pot of soup at home for myself and my partner, neither I nor my partner pay tax on it. (The value of the soup we create ourselves is what's called "imputed income," but the IRS doesn't ask us to pay tax on it.) I don't need special business permits, and when my partner helps chop veggies, she does not become my employee. 

Furthermore, it's hard to know how far the taxing of barter income actually extends. The IRS rule on barter, as written, appears to tax any good or service you receive in exchange for any other good or service. In practice, however, it's probably not such a blanket rule. The IRS doesn't seem to concern itself with one-time, casual, non-commercial exchanges of goods or property. Administratively, it would be a hassle both for taxpayers and the IRS to report the plums I gave my neighbor in exchange for his figs. Unfortunately, it's hard to say at what point a barter arrangement has become sufficiently formal, commercial, or regular to be something that you should report. 

There are also gray areas in designating what, exactly, is a business and what is an employee. As the informal economy begins to flourish, we may be surprised to sometimes find ourselves, unintentionally, operating a business, or, unintentionally, employing someone. 

Sound confusing? Perhaps some examples and an extended metaphor will help. Let's look at how all these rules play out using other scenarios in which I make soup: 

• Soup Parties: What if I started throwing a fabulous monthly soup party for my friends? It's all for fun and for free, although my friends sometimes show their appreciation by inviting me over for dinner, or by bringing dessert to my party. For the most part, these activities fall under the category of "gift," and there will be few legal issues to worry about. I haven't become a restaurant and the dessert my friend brings probably won't be taxable to me as "income". (However, even while this seems like an unregulated realm, I've been surprised to learn that in some cities there are laws that limit how many people you are allowed to feed for free).
• Gift Economy Soup: Now what if I start having weekly soup parties and my friends start doing things for free too? As the spirit of giving and generosity grow, friends might offer free massage, gardening, computer help, handy work, or other favors. Other friends hold weekly salad nights, curry nights, or cook-out nights, and I get free dinners every day of the week! In this circle of giving, no one is obligated to give or receive anything, and no one is officially keeping track of who gives what and how it should be valued. What are the legal implications here? Since the giving occurs among friends and comes from a place of generosity, shouldn't it be tax free? And because there are no contractual expectations of compensation and because people aren't bargaining for things at a market prices, these activities aren't commercial, are they? I would say that's probably right, but it's hard to answer these questions with complete certainty. Slight variations in the above scenario could cause it to look more like example #3 (Barter Soup) or #6 (Soup Enterprises), which probably are taxed and regulated as businesses. 
• Barter Soup: Now what if my accountant offers to prepare my taxes in exchange for coming to five of my famous soup nights? Deal! But what does it mean legally? This example differs from the above Gift Economy example, because now we have a direct exchange that we've bargained for, and we have a binding verbal contract for barter. As discussed above, it's not clear to me that all barter is taxed, but this arrangement is something the IRS would want us to report. Another question to ask here is: am I now accidentally operating a soup business? Since I have a binding and bargained for agreement to receive valuable services as "payment" for my soup, I've essentially sold soup to my accountant. Regulation of business comes from all kinds of agencies – health departments, planning departments, state tax boards, and so on. In the eyes of some agencies, selling soup even one time is not acceptable. Since the law varies from place to place, and from agency to agency, the main thing to remember is: be careful and do your research before you accidentally find yourself in business. 
• Time Bank Soup: To continue expanding on the soup scenarios, my next project could be going to the homes of elderly and disabled to help with cooking. Because they and I are part of a local time bank similar to the Japanese Furaei Kippu ("Caring Relationship Tickets") system, for each hour that I spend helping out, I am credited a "time dollar" through an online accounting system. Later on, I could redeem each "time dollar" for an hour of someone else's time. In three rulings, the IRS has given some vague indication that they aren't interested in taxing exchange of services like this. They give at least two reasons: 1) The exchanges are informal, meaning that I get no contractual right to have my favor returned. 2) The exchanges are non-commercial, meaning that they aren't bargained for at market rates; whether I spend an hour cooking soup or an hour providing legal advice, my hour is valued at the same rate, and all transactions are an-hour-for-an-hour. Those tax rulings are not supposed to be relied on as precedent, and there is disagreement about how they should be interpreted. Still, they provide some of our only clues about what the IRS views as being outside the realm of taxation.
• Soup for Hire: Next, my landlord, who lives downstairs from me, learns of my superb soup and asks me to become a personal chef for her family, in exchange for allowing me to live rent free. I begin cooking two meals a day for her family, and at her pleading, learn to make things other than soup. The value of my free rent should be reported as income on my tax returns, and the value of my cooking services should be reported on her tax returns as rental income. It's quite possible that I should now be classified as her employee, since I work for her regularly and take some direction from her about what to cook. Knowing whether a household worker is an employee or an independent contractor is critical. If you misclassify a household worker, you can end up with heavy fines. (Then, when you run for public office, you can end up with "nannygate").
• Soup Enterprises: Moving on with my soup scenario, now my soup has become so popular that I make multiple pots of soup every day, invite people over to share it, or put it in mason jars for people to pick up on my door step. No one ever pays me U.S. dollars for my soup, but I have been able to use soup to "pay" for most of what I need. I now get "free" health care, bike repair, fresh produce, and many other necessities and perks in exchange for soup. Even with no money changing hands, chances are that I've suddenly found myself in the soup business, and should pay tax on the value of most of what I receive in return. I will need a business license and various food-related permits. Also, as crazy as it sounds, when my friends come over to hang out in my kitchen and help me chop veggies, the law says I should be paying them minimum wage.
  
• Soup Bucks: Finally, I can take my soup operation one step further and start creating soup gift certificates. If I "buy" things with soup, it might be more convenient to give people a certificate that they can redeem for soup when they need it or which they could give to someone else. In fact, the U.S. Dollar came about in a similar way, except that it was backed by gold, not soup. If my "Soup Bucks" start circulating within my local community, they essentially become a local currency. Each certificate has value not only because it can be exchanged for soup, but because it can be exchanged with anyone who is willing to accept it. The success of Soup Bucks as a currency will be based on the community's trust in my ability to keep on making soup. Starting your own currency and printing paper money is a legal and legitimate thing to do in all but two states, and with some limitations. But if you plan to back the currency with a guarantee of particular goods or services, then it's possible that the currency also meets the definition of a gift certificate, which is a form of contract and has various regulations attached. 

This is the first in a series. In the next entry, we look more closely at the legal nuts and bolts of the gift economy….

Source: Janelle Orsi
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License.

How to (Legally) Open a Gift (Economy)

In part one of this series, "How to Barter, Give, and Get Stuff," attorney Janelle Orsi explores the legal ramifications of "third economy" transactions that happen without money, through barter, gifting, time banks, and other creative means. Now in part two, she delves more deeply into the nuts and bolts of the gift economy. In part three, Janelle tells you how to start bartering. 

Giving and receiving gifts is the simplest way to get started in informal economy, because giving is something we all do naturally and instinctively. When we consciously take gifting to new levels, our local economies and communities will thrive in new ways. As described in part one of this series, a gift economy could begin with something as simple as a regular dinner party among friends, and it could grow to become a significant way in which we meet our needs.

So how might you get started? One way is to simply let your friends know you are exploring a gift- based economy, and tell people what you need and what you have to offer. Feeding people is a particularly good way to get it started, because sharing a meal builds connections among people. Don't ask people to pay you back, but do encourage them to pay it forward! Starting or joining a gift circle is another way to get started, and I recommend reading Alpha Lo's writings on gift circles. 

True gifts are largely unregulated and untaxed. As a general rule, gifts we receive do not need to be reported as part of gross income. However, the law defines "gift" in a particular way. Many things we receive, such as employee bonuses, may feel like "gifts". Yet, sometimes employee bonuses meet the legal definition of a gift, and, other times, they do not. The difference turns on a handful of factors.

Unwrapping the Gift

To help us delve deeper into the definition of a gift (specifically regarding the Internal Revenue Code Section 102 definition), the U.S. Supreme Court has given us some guidance, best summed up in Commissioner v. Duberstein 363 U.S. 278, 285 (1960). Here are some quotes from the Supreme Court, along with my own summaries in bold: 

• Gifts arise from generosity: "A gift proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity, or like impulses". 
• Gifts don't come from a moral or legal obligation: "If a payment proceeds primarily from the constraining force of any moral or legal duty, it is not a gift".
• Gifts are not given with an anticipation of return: "If a payment proceeds from the incentive of an anticipated benefit of an economic nature, it is not a gift". 
• Gifts are not given as a payment for something: "Payment made in return for services rendered is not a gift". 
• The intention of the giver is what matters: "In determining whether a transfer of property is a gift, the controlling factor is the intention with which the transfer has been made". 

The Barter System Legal Guide

In part one of this series, "How to Barter, Give, and Get Stuff," attorney Janelle Orsi explores the legal ramifications of "third economy" transactions that happen without money, through barter, gifting, time banks, and other creative means. In part two, she delves more deeply into the nuts and bolts of the gift economy. Now in part three, Janelle tells you how to start bartering. 

When it comes to emphasizing the importance of barter in our economy, lately, I've been a walking example. Literally. My hiking boots need re-stitching around the seams, and while I'd love to get them repaired at the local shoe repair shop, that costs money. There is a shortage of money in circulation these days, and it's especially hard to justify spending on things that don't feel like absolute necessities. 

On the other hand, if someone with skill would take an hour to repair my shoes, I'd happily take an hour to cook them a meal or provide legal services. The fact is that we are all surrounded by people who have both time and skills, and the traditional means of exchanging time and skills is money. Having a shortage of money shouldn't mean our economy has to grind to a halt, or that my socks should get wet on a rainy hike. 

Barter, time banks, and other forms of exchange can jump start our economy in new ways – ways that make more efficient use of underused skills and assets, that provide work opportunities for the underemployed, and that enable all of us to get our needs met. 

When regular money is out of the picture, however, it can be hard to understand how the law applies to our economic transactions. Before you read this article, I strongly recommend reading part one of this series, which illustrates some of the gray areas that arise between operating a business and not operating a business, having an employee and not having an employee, and earning taxable income and untaxable income. Here is some additional information to help you get started bartering.

Entering into a Barter Agreement

If you are bartering for services, for something of significant value, and/or for something that relates to your business, it's a very good idea to get the arrangement in writing. The writing doesn't have to be a formal contract; it could be sufficient just to have an email exchange where you discuss and agree to the details. People tell me stories of barter gone wrong, and I find that it typically arises from a lack of clear expectations about what people will do for each other. "I will tune up your car if you build my website" is not a sufficiently detailed agreement. 

An agreement for barter should at least include:

• The timeframe for getting things done; 
• A detailed description of what will be done or exchanged, the quality and scope of the work, and what constitutes a job well done; 
• Whether there's an upper limit of the number of hours each person will put in on the project; 
• For tax purposes, what value will you assign for the services; and 
• What happens if one person fulfills their end of the barter agreement, but the other person does not? How will the person who did their work be compensated for their time? In regular money, and, if so, how much?