How does it work?

Barter is generally described as the exchange of goods or services between parties without the use of cash. Where direct barter implies a direct one-to-one transaction, a barter network or trade exchange allows barter credits or trade dollars to be accounted so that direct bartering is no longer necessary, but can be accomplished by any multiple of parties.

An effective trade exchange is a system which utilizes computerized information sharing and human intelligence, relationships, and creativity to create opportunities for members to trade their products and services on a regular basis. A small cash transaction fee accompanies all barter transactions, thus paying for banking and promotional infrastructure of the network.  Most businesses see this fee similarly to that of a sales commission as it is bringing new business that only had the opportunity to come as a result of the network.

 

Because this is essentially the creation of an alternative currency, the question if this sort of system is legitimate often arises.  Under the Tax Equity and Financial Responsibility Act of 1982, the federal government officially recognizes barter exchanges as third-party record keepers—meaning they record barter transactions and report, by law, client barter income to the IRS. This puts barter exchanges on equal footing with banks, credit unions, securities brokers and others as legitimate custodians in the eyes of the law.  A 1099B is given to each business at the end of the year based upon their trade income.  From a tax reporting standpoiunt, there is no difference is in trade than cash.

 

What is barter? (video link)

 

Explanation of barter exchanges on MSNBC.com