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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.

JPhi1618
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2 Answers2

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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...

Rory Alsop
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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.

Dheer
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