Did ya hear about the teen that bartered his way from a cell phone to a Porsche using craigslist? Sounds good, huh? Of course, most people gloss over the fact that Mr. Ortiz probably earned pennies per hour with his trades if you look at all the time spent. Over two years, Steven Ortiz successfully worked his way up in the value of his trades by scanning craigslist classifieds for as much as 5 hours per day.

Another gotcha: despite low income per hour, net gains due to bartering are still taxable. In Mr. Ortiz’s case, he is probably not going to pay taxes on his bounty because even with this barter net gain income , he probably doesn’t make enough money to file a tax return – he’s only 17. If you pulled off the same feat, unless you are earning below the first taxable income tier, you will have to report the net gain in value, or the difference in the worth of a cell phone versus a Porsche, in this case about $9000.

From the IRS website:

If you engage in barter transactions you may have tax responsibilities. You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

Barter dollars or trade dollars are identical to real dollars for tax reporting. If you conduct any direct barter – barter for another’s products or services – you will have to report the fair market value of the products or services you received on your tax return.

Where would you report the net gain? The IRS says the your gain in “barter dollars” would have to be reported as Schedule C income. If you usually file your tax return using form 1040 EZ, this will no longer be an option. If this is the first time filing a “regular” 1040, you probably want to talk to a financial adviser.

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