On Sat, 11 Mar 2000 17:19:01 -0500 "Michael S. Lorrey"
If two people agree to an exchange where
> cash changes hands, then presumably its an even trade, i.e. no
> income or
> capital gain is realized. If this is so, how can it be taxed?
> Mike Lorrey
A dealer or trader who operates as a sole proprietorship business files
Form 1040 Schedule C and reports his gross cash income from exchanges
during the year, and deducts the cash cost of goods and qualified
business expenses, and reports the fair market value of his trade goods
inventory as of the end of each year. It makes little difference whether
he does cash deals or strictly barter; either way the net profit will
show up on Schedule C.
Suppose you start the year with a pig worth $50 (fair mkt value you
reported) and no cash. The pig is your inventory and it has a fair
market value of $50. You trade the pig for a horse. At this point it
doesn't matter tax-wise what the horse is worth, to you, or to anyone
else. Then you trade the horse for a saddle. Again, at this point it
doesn't matter tax-wise what the saddle is worth, to you, or to anyone
else. You trade the saddle for a cow. You trade the cow for a
motorcycle. You trade the motorcycle for a car. Then you trade the car
for another car, and the tax year has ended. You still have no cash, you
do not have the pig you started with, but you do have a car. The car is
your inventory. Say it has a fair market value of $1,000. That is your
end of year inventory value. There has been no cash income and no cash
expenses or cash cost of goods, so the net Schedule C income for the year
is $1000 - $50 = $950.
An investor reports sales and exchanges of capital assets on Form 1040
Schedule D. For each sale or exchange, the gross cash proceeds of the
sale, or the fair market value of the item received in exchange is
reported, along with the cost basis of the item sold or exchanged away.
The difference is the capital gain or loss for that transaction. There
are special rules for exchanging 'like kind' capital assets. For
exchanges of 'like kind' property, only the cash portion of the trade, if
any cash is involved, is taxable (to its recipient) for that year. An
example is the 'Starker Exchange' rule for investment real estate. For
personal use real estate, using a 'like kind' rule, two house owners
should be able to trade houses without reporting a capital gain
(assuming, for simplicity, no cash or what they call 'taxable boot' is
involved). At some later time, when the house is sold for cash, or
traded for non-'like kind' property, there might be a recognized capital
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