BUSINESS

The IRS considers goods and services exchanged through bartering to be taxable income to both parties

Reviewed by Lea D. Uradu
Fact checked by Vikki Velasquez

Not all transactions involve money. Sometimes, individuals or companies exchange goods or services instead. This activity is commonly known as a barter transaction.

If you’re involved in barter transactions, here is what you need to know about how and where to account for them for tax purposes.

Key Takeaways

• Bartering is the exchange of goods and services between individuals and businesses rather than an exchange of money.
• Bartering has become particularly popular online and is often conducted through barter exchanges or clubs.
• The Internal Revenue Service considers goods and services exchanged through bartering to be taxable income to both parties.
• It has rules on how parties to these barter transactions must account for them.

Reporting Barter Revenue

Businesses

Under Internal Revenue Service (IRS) rules, business owners and companies engaged in bartering are supposed to account for the fair market value of all the goods and services they receive or provide through it.

In its annual “Tax Guide for Small Business” publication, the IRS demonstrates where bartering rules may come into play. For instance:

“You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. You must include the fair rental value of the apartment in your gross receipts. Your landlord must include the fair market value of the work of art in their rental income.”

In addition, the IRS notes, “Just like payments made with money, if a business makes payments of bartered services to another business (except a corporation) of $600 or more in the course of the year, these payments are to be reported on Form 1099-MISC.”

For bookkeeping purposes, in a standard journal entry, a barter exchange account is treated as an asset account, and the bartering revenues are treated as income items. For example, if the fair market value of a good or service is $100, the barter exchange account would be debited $100, and barter revenues would be credited $100.

Individuals

In the case of individuals engaged in barter transactions, barter revenue must be accounted for, in dollars, on their IRS Form 1040, Schedule C: Profit or Loss From Business. In some cases, it could also be reported on Schedule E: Supplemental Income and Loss.

Note

Bartering is an ancient practice, but gained new popularity (and greater IRS scrutiny) with the advent of the Internet, which made it much easier for individuals and businesses to conduct barter transactions.

Example of a Barter Transaction

A common example of a barter transaction today involves two Internet companies that exchange ad space on each other’s websites. If company A trades $100 worth of ad space in exchange for ad space of like value on company B’s website, both would have to count that as income on their books.

Bartering vs. Trading Services

The IRS differentiates between a trade of similar services between two similar parties on a non-commercial basis and the act of trading saleable business goods or services as described in the example above.

For example, two neighbors who trade off the task of babysitting their children aren’t going to have to report that as income on their tax returns. However, when a plumber provides plumbing services to a dentist in return for dental work, that is considered bartering for tax purposes, and both parties could owe income tax on the value of the services they received.

What Is a Barter Exchange?

A barter exchange is sometimes referred to as a barter club. According to the IRS, it’s an organization whose members exchange property or services with each other. A small business owner might, for example, trade goods or services directly with another member or in exchange for credits that they can use at a future date with a different member. Such credits are considered income for the year they are received, even if the recipient doesn’t use them until later.

The barter exchange must supply each member with an annual Form 1099-B: Proceeds From Broker and Barter Transactions showing what they received during the past year. It also must give this information to the IRS.

Are Bartering Transactions Subject to Tax Withholding?

In general, barter transactions are not subject to income tax withholding. However, if you participate in a barter exchange or club and fail to provide it with your tax identification number (TIN) (or provide an incorrect one), you may be subject to backup withholding of 24%.

Do States Also Tax Barter Transactions as Income?

Yes, many U.S. states tax barter transactions as income and may also impose sales taxes on them. According to the accounting firm Wolter Kluwer, the increasing need for revenue for states is narrowing their focus on bartering and unreported transactions.

What Is Fair Market Value for Bartering Purposes?

The fair market value (FMV) of a good or service isn’t always easy to determine, but it is typically based on what that good or service would normally sell for or has historically sold for. The IRS offers a number of similar definitions in its various publications, including this one in its rules for valuing donated property: “It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”

In the specific case of bartering, the IRS adds that, “If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise.”

The Bottom Line

While no money may change hands in barter transactions, value does. The IRS views the exchange of bartered goods and services as a form of income and expects it to be reported as such.

For that reason, it’s important for individuals and businesses engaged in bartering to keep good records and to pay particular attention to the fair market value of whatever product or service they provide or receive.

Reviewed by Michael J Boyle
Fact checked by Suzanne Kvilhaug

Economists and analysts pay close attention when the Federal Reserve meets to raise or lower short-term interest rates. A lower Fed rate may make stock traders rejoice, but it’s not necessarily good news for everyone: Rate cuts tend to favor borrowers but hurt lenders and savers.

Interest rate changes also greatly impact consumer behavior and the volume of economic activity. Higher rates translate to larger borrowing and financing costs for purchases made on credit.

Key Takeaways

• Interest rates have a direct effect on consumer behavior, impacting several facets of everyday life.
• The Federal funds rate is the interest rate for loans between banks.
• Borrowing becomes cheaper when rates go down, making large purchases such as home mortgages and auto loans on credit more affordable.
• Borrowing is more expensive when rates go up, putting a damper on consumption.
• Higher rates do benefit savers who get more favorable interest on deposit accounts.

What Is the Federal Funds Rate?

When we talk about the Federal Reserve raising or lowering interest rates, we are actually talking about the federal funds target rate. The target rate is a guideline for the actual rate that banks charge each other on overnight reserve loans.

Eight times a year, the Federal Open Market Committee (FOMC) meets to set the target rate. Individual banks negotiate the rates on loans to one another, but they usually stay close to the target rate. The target rate is also referred to as the “federal funds rate” or the “nominal rate.”

The federal funds rate is important because many other domestic and international rates are linked directly to it or move closely with it.

Why Do Rates Change?

The federal funds rate is a monetary policy tool used to achieve the Fed’s goals of price stability or low inflation and sustainable economic growth. Changes to the federal funds rate influence the money supply, beginning with banks and eventually trickling down to consumers.

The Fed lowers interest rates to stimulate economic growth. Lower financing costs can encourage borrowing and investing but rates can spur excessive growth and perhaps inflation when they’re too low. Inflation eats away at purchasing power and can potentially undermine the sustainability of the desired economic expansion.

The Fed will raise interest rates when there’s too much growth. Rate increases are used to slow inflation and return growth to more sustainable levels. Rates can’t get too high because more expensive financing can lead the economy into a period of slow growth or even contraction.

2%

The target inflation rate that the Federal Reserve seeks to achieve.

Financing

The Fed’s target rate is the basis for bank-to-bank lending. The rate that banks charge their most creditworthy corporate customers is known as the prime lending rate. It’s linked directly to the Federal Reserve’s target rate and is often referred to as simply “the prime.”

Consumers can expect to pay prime plus a premium depending on factors such as their assets, liabilities, income, and creditworthiness.

A rate cut could help consumers save money by reducing interest payments on certain types of financing that are linked to prime or other rates that tend to move in tandem with the Fed’s target rate.

Mortgages

A rate cut typically lowers the cost of financing a home but the extent of the benefit from lower mortgage rates depends on the type of mortgage loan.

A rate cut will have no impact on the amount of the monthly payment for a fixed-rate mortgage. Low rates can be good for potential homeowners but fixed-rate mortgages don’t move directly with the Fed’s rate changes. A Fed rate cut changes the short-term lending rate, but most fixed-rate mortgages are unaffected.

Adjustable-rate mortgage (ARM) payments will generally decrease when the Fed issues a rate cut. The amount by which a mortgage payment changes will depend on the rate the lender uses when it resets. Many ARMs are linked to short-term Treasury yields that tend to move with the Fed. Many home-equity loans and home-equity lines of credit (HELOCs) are also linked to prime or SOFR.

Important

The FOMC decided to maintain the federal funds rate at 4.25%-4.5% in March 2025 based in part on progress made against inflation.

Credit Cards

The impact of a rate cut on credit card debt also depends on whether the credit card carries a fixed or variable rate. A rate cut usually results in no change for consumers with fixed-rate cards. Many credit cards with variable rates are linked to the prime rate, so a federal funds rate cut will typically lead to lower interest charges.

Credit card companies can change interest rates, even for cards with a fixed rate, so long as they provide advance notice.

Savings Accounts

Consumers usually earn less interest on their savings when the Fed cuts interest rates. Banks typically lower rates paid on cash held in bank certificates of deposits (CDs), money market accounts, and savings accounts. It usually takes a few weeks for the rate cut to be reflected in bank rates.

CDs and Money Market Accounts

There’s no need to worry about a rate cut if you’ve already purchased a bank CD because your rate is locked in. A rate cut will result in lower rates. If you purchase additional CDs, however, your interest payments will be lower.

Deposits into money market accounts (MMAs) will see similar activity. Banks use MMA deposits to invest in traditionally safe assets like CDs and Treasury bills, so a Fed rate cut will result in lower rates for money market account holders.

Money Market Funds

A money market fund (MMF) is an investment account, unlike a money market account. Both pay higher rates than regular savings accounts, but they may not have the same response to a rate cut.

The response of MMF rates to a rate cut by the Fed depends on whether the fund is taxable or tax-free, such as one that invests in municipal bonds. Taxable funds usually adjust in line with the Fed, so consumers can expect lower rates from these securities after a rate cut.

Rates on municipal money market funds already fall beneath their taxable counterparts because of their tax-exempt status, and they may not necessarily follow the Fed. These funds may also be linked to rates such as SOFR or the Security Industry and Financial Markets Association (SIFMA) Municipal Swap Index.

Investments

Interest rates also directly impact your investment portfolio including a 401(k) plan and brokerage accounts. Lower rates are often a boost to stock prices, because they make it easier for companies to borrow money. Lower rates also let investors with margin accounts take greater advantage of leverage at lower rates, increasing their effective purchasing power.

Higher rates can pull stocks lower but increase the value of bonds. Longer-term bonds are generally more sensitive to interest rate changes than near-term bonds.

Explain Like I’m Five

The federal funds rate is the interest rate for short-term loans between banks. Eight times a year, the Federal Reserve decides whether to raise or lower its target rate. Other loans are based on the funds rate, so a rate change has a ripple effect throughout the banking system.

A rate cut makes it cheaper to borrow money. That makes it cheaper for corporations to make investments and hire people, and makes it easier for consumers to buy a house or car. Higher rates make it harder to borrow, but they increase the interest rates on bank deposits.

How Will I Use This in Real Life?

If you ever take out a mortgage or a car loan, or even a credit card, the interest rate will be partially determined by the federal funds rate. If you plan to take out a large loan, you may be able to save money by waiting until interest rates are low.

When the Federal Reserve changes the funds rate, it affects the costs of other loans, too. Some consumer loans have floating interest rates: When the Fed decides to raise rates, your monthly payment goes up.

How Do Interest Rates Affect Consumers?

Higher interest rates generally make the cost of goods and services more expensive for consumers because the cost of borrowing to purchase them is higher. Consumers who want to buy products that require loans, such as a house or a car, will pay more because of the higher interest rate. This discourages spending and slows down the economy. The opposite is true when interest rates are lower.

Who Benefits From High Interest Rates?

Financial institutions, and specifically banks, generally benefit from higher interest rates. Banks make money from the rates they charge on their loans to consumers. The higher the rate, the more money they make.

Who Benefits From Inflation?

Borrowers benefit the most from inflation, as the money they pay back to lenders is worth less than it was before. This is the case provided that wages are also increasing for the borrower.

The Bottom Line

The Federal Reserve uses its target rate as a monetary policy tool and the impact of a change to the target rate depends on whether you’re a borrower or a saver. It’s important to read the terms of your financing and savings agreements to determine which interest rates apply to you and determine how a Fed cut can impact your financial situation.

Fact checked by Suzanne Kvilhaug
Reviewed by Thomas J. Catalano

What Is Federal Reserve Regulation D?

Regulation D is a Federal Reserve rule created to ensure banks and credit unions have enough cash reserves, and it sets requirements for savings and money market accounts.

In 2020, the Fed changed the reserve requirement for financial institutions and removed the limit on consumers’ savings withdrawals. Despite the suspension of the rule, banks and credit unions were given the option to enforce a monthly limit.

Key Takeaways

• Regulation D, a federal rule, set reserve requirements for banks and credit unions.
• It limited the number of withdrawals or transfers consumers could make from their savings and money market accounts.
• Financial institutions are no longer required to impose the limits.
• Some banks and credit unions have kept the six-transaction limit in place, while others do not enforce the rule.

How Regulation D Worked

The Federal Reserve put Regulation D in place to implement monetary policy.

One way it sought to ensure adequate levels of reserves at financial institutions was to limit withdrawals and transfers from savings accounts. The rule does not limit all types of transactions; it focuses on those considered to be “convenient” transactions, and those include bill pay services, writing a check, using a debit card, overdraft transfers, and money transfers completed by phone, fax, or online.

Bank checks and withdrawals or transfers made inside a bank or at an ATM did not count toward the monthly limit.

The rule applied to savings-related accounts and did not limit checking accounts, which are transaction-oriented (intended for tasks such as paying bills and making purchases).

Important

Fed Reg D is not the same as Securities and Exchange Commission (SEC) Regulation D, which governs private placement exemptions.

Changes in Regulation D

In April 2020, the Federal Reserve announced that it was no longer requiring financial institutions to enforce transaction limits because it was switching to a different reserve strategy. Additionally, it wanted to give consumers greater access to their cash during the coronavirus pandemic and the related economic impact. However, the interim rule did not forbid financial institutions from maintaining the withdrawal limits, and some banks and credit unions continue to enforce the monthly caps.

Which Transactions Were Limited?

The rule covered these transaction types for savings and money market accounts:

• Online transfers
• Phone or fax transfers
• Overdraft transfers to a checking account
• Debit card transactions
• Check transactions
• Automated transfers, such as recurring withdrawals or bill pay

Is Regulation D Still Suspended?

As of May 3, 2025, Regulation D was still suspended. It will likely continue to be suspended as it is part of the Fed’s ample supply of money strategy.

What Are the Requirements of Regulation D?

Regulation D required banks to restrict transactions from savings and money market accounts to a maximum of six per month to help the Fed implement monetary policy. The requirements were suspended in 2020.

Can I Withdraw $20,000 From a Bank?

Yes, you can withdraw $20,000 from a bank. Your bank may not allow that amount in one transaction, so it’s best to check before you make the withdrawal to learn its procedures.

The Bottom Line

Some banks and credit unions enforce a monthly six-transaction limit on savings or money market accounts, but they are no longer required to do so by Regulation D. Contact your financial institution or check your account details to see if you are subject to any limits and to understand any related issues.