With barter transactions and exchanges on the rise, artists now have greater opportunities for bartering their works in return for goods or services. While bartering can be a great form of payment, artists should be aware that when they barter, they are entering into taxable transactions with potential income tax and sales tax consequences.

Bartering Services

Pursuant to federal income tax laws, when an artist receives goods or services in exchange for his services, the fair market value of the goods or services received by the artist is included in his gross income.

Example:

A painter agrees to give painting lessons to an accountant in exchange for tax return preparation. The income tax law treats the transaction as: (1) the performance of painting lessons by the artist for a fee (the fair market value of the tax return preparation services); and (2) the performance of tax return preparation services by the accountant for a fee (the fair market value of the painting lessons). As such, the fair market value of the painting lessons is taxable to the accountant, and the fair market value of the tax return preparation is taxable to the painter.

The fair market value of services that the artist receives in a barter transaction is the price typically charged by the party performing such services. Generally, the value of those services is included in the artist’s gross income when performed.

Bartering Artwork

Pursuant to federal income tax laws, when an artist receives goods or services in exchange for his artistic creations, the fair market value of the goods or services received by the artist is included in his gross income.

Example:

An auto mechanic acquired a painting created by an artist in return for providing the artist with auto repairs. The painting and the auto repairs are each worth $500. The income tax law treats the transaction as two sales: (1) the sale of artwork by the artist for $500; and (2) the provision of auto repairs by the mechanic for $500. The fair market value of the auto repairs is taxable to the artist, and the fair market value of the painting is taxable to the mechanic.

If the painting were instead worth $600, then the auto mechanic would be treated as having received $600 for the auto repairs and the artist would be treated as having received $500 for the painting.

As stated above, the fair market value of goods or services received by an artist in a barter transaction is the price typically charged by the party performing such services. Therefore, the artist’s taxable gain on the deemed sale of the artwork is determined by subtracting the artist’s adjusted tax basis in the object bartered from the fair market value of the goods or services received by the artist in the exchange. The artist’s adjusted tax basis in such object is likely a minimal amount (e.g., the cost of canvas, paints, paper and other supplies to the extent not already deducted as a business expense), so the artist’s taxable gain will often be equal or close to the fair market value of the goods or services received.

Sales Tax

The barter of goods or services may also be subject to state and local sales tax.2 While each state may have different rules, such as exemptions for certain occasional sales and non-taxable services, in general, sales tax liability for barter exchanges is calculated on the value of the goods or services given in trade.

In New York, for example, if an artist trades a painting with a fair market value of $500 to an auto mechanic in exchange for auto repairs valued at $500, the painter is treated as a purchaser of the auto repairs and owes sales tax on the receipt of the auto repairs based on the value of the painting provided to the mechanic as payment. The painter is also treated as having sold the painting and, as the seller, must collect sales tax from the mechanic based on the value of the auto repairs received from the mechanic.