Are Friendships and Family Relationships Taxable?

Before money existed, people exchanged goods and services through bartering. Even after money became the logical solution to the problem of finding someone who could offer what you wanted and wanted what you had to offer, bartering remained a viable alternative way to do business.

Today, as the Internet has enabled more would-be barterers to find each other, bartering is becoming more common. Online barter exchanges like Merchants Barter Exchange, BarterFest, and Barter Planet help people connect with each other and use barter credits to create a bartering circle. (For example, a crafter may make a quilt for a plumber who fixes a leak for a librarian, who catalogs a personal library for the crafter.) Both goods and services can be bartered, saving the goods from a landfill and saving money for the barterers.

Having to wash dishes to pay for a meal may be an old joke, but it does point to the possibilities bartering can open up. If you want something you don’t have the cash for, you can always offer something other than money in exchange for it. On the other hand, if you have goods or services to barter, you could also offer those same things in exchange for money to spend or save. (You could “save” a barter in the form of barter exchange credits, but you can’t earn interest or dividends on it.)

If you live in the United States, you might as well exchange money, anyway, because bartering is taxed by the IRS. According to IRS documents, “The fair market value of goods and services exchanged is fully taxable and must be included on Form 1040 in the income of both parties.” So, even if you don’t actually earn money bartering, you still have to pay the IRS as if you had and you still have to take the time to figure out the fair market value for the goods or services you provided. When bartering costs money — even tax money — its benefits quickly erode.

It seems the best use of bartering is not often called bartering; it’s called helping out a friend. If my friends need help moving or a ride to the doctor or grammar tips, I’m willing to help them out. Because they’re my friends, they’re also willing to help me. If I have things I can no longer use but that my friends need, I’m happy to pass them on. They, in turn, give me things they no longer need. I might not say, “Hey, I’ll help you move if you give me that electric pencil sharpener you no longer use,” but I know I can call if I need something. That’s part of what makes friendship what it is.

After learning that bartering was taxable, I began to wonder, Are friendships and family relationships taxable? Would I have to pay taxes if I wrote a poem for my cousin to read at her parents’ 50th wedding anniversary and she babysat my kids three weeks later? I called the IRS to ask and learned that if my cousin agreed to babysit specifically to return the favor of writing the poem, it would be considered a taxable barter, but if that intent was not expressed, it could be seen as two separate favors. So, according to the IRS, if you agree to trade babysitting nights with friends to save money, you owe taxes.

The moral of the story? If you want to do something for a friend, don’t expect anything in return. If you do, you might have to pay for it.

This entry was posted in Personal Finance, Relationships, Taxes and tagged , , , , , . Bookmark the permalink.

5 Responses to Are Friendships and Family Relationships Taxable?

  1. Jeff says:

    if the IRS had its way, everything would be taxable. Bartering should not be taxed. If taxation can be avoided by simply saying that neither party expected something in return, the tax was ridiculous in the first place.
    get the government’s hand out of your pocket, force them to decrease spending and lower taxes. Vote Ron Paul in your state’s primary/caucus.

  2. Shannon,

    Thanks for the entertaining article. One slight correction to your text: Merchants Barter Exchange is not an internet-based nor online barter company, we have a live, hands on brokerage to process all the trades for our national members. We are very, VERY different to the new, web-based companies out there.

    We are one of the very few national barter companies that transacts all our trades on a 100% barter basis, offers a true cash alternative, does not allow cash-barter blends, nor price gouging or inflation. Simply put, we have a barter system that works for business owners of any size.

    No offense taken, just wanted to make a point of clarification. I found you piece very entertaining.

  3. Ed says:

    It makes me think of “POPEYE” the movie where the tax collector taxes everything.spitting on the street tax, breathing tax..etc. Is that where we are heading.???. why is it legal for the IRS to extort money when extortion is a felony if law abiding citizens do it..Are we getting back to the Boston Tea Party times ?This is why our forefathers came to this land??

  4. Joe says:

    This is why everyone should support TeaParty canidates. You may not like everything he/she is for, but when push comes to shove, it’s your money and if you want to donate to a cause or a group you’re free to do so.

  5. Joe says:

    If our state rep’s are going to decide our fate, we should be able to vote for all of them not just the one’s from our own state. Point..what’s good for Californic may not be in the best interests of the country as a whole. Our founding fathers stated that NO MAN should be taxed from the “sweat of his brow”. The Federal Gov. should operate from taxes and duties collected from imports and corporations ONLY.

Leave a Reply

Your email address will not be published. Required fields are marked *