What is Bartering?

Bartering is like trading baseball cards with a friend…

No money is involved; instead, you exchange goods (or services). Let’s say you have a rare Babe Ruth card. Your friend has a Hank Aaron card and a Mickey Mantle card — Neither is likely as valuable as the Babe Ruth card, but Hank Aaron is your favorite player. So, you trade the Babe Ruth card for both the Hank Aaron and Mickey Mantle cards.

Bartering is the direct exchange of assets between two or more parties. No cash or other medium of exchange (such as gold) is used, and the assets are directly traded. Individuals, countries, and companies can all engage in this direct trade. Goods and services can both be traded in bartering. For example, if you’re hungry and your friend owns a restaurant, you might offer to help wash the dishes in exchange for a meal.

Bartering has been around for a long time — Ancient Egyptians painted scenes with people bartering in markets. Bartering likely existed before it was recorded in history. Many experts believe bartering is the oldest form of commerce, predating currencies. Some evidence suggests that ancient Egypt’s economy and Mesopotamian tribes relied on bartering, and that people in these civilizations may have used a credit system based on the direct trade. For example, farmers could take seeds from the government, then pay the loan back with harvested crops.

Bartering has played an important role in civilizations throughout history. The Silk Road was one of the most important trade routes in the world. Wool, gold, silver, and other products flowed from Europe to China, where the goods were traded for silk, spices, and other goods. Native Americans had been using bartering before the arrival of Europeans. When Europeans settled the Americas, they bartered precious metals, furs, food, and other products for European goods. Over time, money has mostly supplanted bartering, but it remains popular on the Internet, where it’s possible for people to trade directly with one another across the world.

When bartering, people try to determine the value of the goods they want to exchange. They may try to figure out how much money each good is worth, and consider how much each asset is worth to others.

People typically barter when they want to trade goods they don’t want or need for things that they do. If a farmer has excess corn, for example, they may want to exchange it with a butcher for meat. In some cases, people may find bartering useful if money is not available. By some accounts, bartering became more popular during economic crises like the Great Depression and the 2008 Global Financial Crisis. As people lost homes, farms, and other properties during both periods, unemployment rose dramatically, making it harder for many to access money.

Bartering has several drawbacks. First, both parties need to have assets that another party wants. For example, a farmer likely won’t be able to trade corn for meat if a butcher doesn’t need corn. Bartering is more straightforward when both parties have the goods or services readily on hand. If one party promises a future payment, the other party has to trust the promise will be kept. And even if both parties have assets that the other party wants, determining the value of each good or service can be difficult. Some experts have suggested that money was invented because of such limitations of bartering.

In order for two individuals to barter, they’d need to each have assets to trade. Each party would likely need to have goods or services that the other party needs or wants. Both individuals would typically have to determine the value of the traded assets and negotiate what they will each give or receive. In the past, people usually traded in person. Now, through internet-based platforms, it’s possible for people in different parts of the world to exchange goods.

Like individuals, companies can trade assets directly. Each party typically determines the value of the goods or services being exchanged. A company might barter with other companies, individuals, or even governments. A company with limited working capital (aka current assets minus current liabilities) may be more likely to barter than a company with access to working capital. For example, during the Cold War, Pepsi traded soda with the Soviet Union in exchange for Stolichnaya vodka. The International Reciprocal Trade Association estimates that companies barter $12B to $14B worth of goods and services each year.

Countries exchange goods and services with one another and with companies. This is often called “countertrade” — An exchange of products without using foreign currency exchange. In some cases, countertrade involves multiple parties. For example, let’s say a country wants to purchase farming equipment but only has wheat to trade. The farming equipment supplier doesn’t need wheat, but another company does, and agrees to pay the farm equipment supplier. So the farming supplier sends equipment to the country in exchange for wheat, then sells the wheat to the other company, which pays for the farming equipment. Countertrade can be especially important for countries that lack access to foreign currencies.

Many governments keep stockpiles of cash (aka foreign exchange reserves), in order to facilitate trade. Some countries don’t have the resources to build extensive foreign exchange reserves. Cash-strapped countries may engage in international trade through bartering. For example, in 2009, Iran sent oil to Thailand in exchange for rice. At the time, Iran was cash-strapped due to sanctions and needed rice. Meanwhile, Thailand could afford to part with rice and had use for the oil. When two countries barter, neither necessarily has to worry about exchanging currency. Each government might assign a monetary value to the goods, based on market prices.

In a barter system or economy, individuals or groups trade goods and services directly without relying on money. In ancient Egypt, the economy depended on direct trade. Sometimes people took goods, such as seeds, and repaid it later with harvested crops. This resulted in a barter-based credit system. Many Native American societies also relied on bartering. But bartering was not the only way to organize an economy before the invention of money. Some argue that the role of bartering may be overstated. In North America, for example, rather than bartering, the Iroquois gathered all of their goods into a longhouse. Female counsels then divided the assets.

The U.S. Internal Revenue Service (IRS) treats goods earned through bartering as taxable income. For example, if you trade a car for a boat, you must declare its fair market value (the price a buyer and seller would agree to in an open market) as part of your gross income. This means that goods you’ve gained through bartering may increase your tax bill. The IRS requires U.S. taxpayers to report assets acquired through bartering on the Schedule C form (aka Form 1040 or 1040-SR). Businesses must also report income from bartering. In fact, bartering can have a significant impact on a company’s taxes. In the United States, companies must report the value of goods received as income. A business may be able to deduct the value of the assets it traded away.

Disclosure: Robinhood does not provide tax advice. For specific questions, you should consult a tax professional.