Bartering: Bringing An Old Practice Full Circle

Bartering is an exchange of goods or services without money. It is not exactly getting something for "free"-you are actually exchanging one product or service of value for another. The primary advantage of this practice is that bartering conserves cash.

An important part of bartering is-first and foremost-having a valuable and desired product or skill to offer. The next important factor is determining the value of that product or service. There are several ways to determine value-i.e. market value, cost basis, or a value based on the useful life of the product. However, the Internal Revenue Service (IRS) actually values the goods and services exchanged through bartering at the fair market value. And as typical with the IRS, gains obtained through bartering are taxable events-even though no actual cash is exchanged.

It is best to have both parties draw up a listing of the products/services being bartered, and assign a (fair market) dollar value to each. Have a discussion and come to an agreement to ensure both parties are satisfied with the arrangement.

How to Protect Yourself

As with everything these days, there are some risks in bartering. To protect yourself and ensure you have a positive experience, make sure to:

Research the credibility of the person or company you are bartering with. This is especially important if you are bartering online or dealing with someone in a different state. If the person is advertising as a company or professional, do a search online to make sure the company actually exists or to see if the person has any reviews available online. You can find out the status of a company (whether they exist and are active or inactive) at any state's Secretary of State website. If the SOS does not have a website, place a quick phone call and they can tell you over the phone (this is public information).

Check references. If the person or company you are bartering with has participated in other transactions, ask them for the contact information of the people they've helped before. Ask questions regarding the timeliness and condition of delivery (if you are bartering for a product) or the quality of service (if you are bartering for a service).

Get it in writing. It is a good idea to get a legal contract in place outlining what has been agreed upon in the barter transaction. Either have an attorney draw up the document (maybe this is a service that can be bartered too!) or get a sample of a barter contract online.

With cash becoming less available in this economy-and more importantly-needing to be saved, consider bartering as an effective means of getting the products and services that you want and need. Done correctly, this practice could have you set for life.