Barter transactions are generally fully taxable to both parties to the exchange. That is, the mere fact that the buyer and the seller of property or services choose to make settlement using non-cash consideration does not exempt the transaction from income tax consequences. If this were not the case, there would be many opportunities to side-step the income tax by arranging barter transactions rather than cash transactions.

Thus, both parties to a barter transaction will have income to the extent of the value of the property or services exchanged. Assuming that services are exchanged in an arm's-length transaction, the amount of income inclusion to each party should be the same, and should reflect the fair market value of the goods or services exchanged. Furthermore, assuming that the transaction is in all respects a business transaction, both parties probably also have offsetting business deductions in the same amount. The timing of the deduction may be delayed in some cases due to a capitalization requirement, or may be delayed because of certain tax accounting rules (including the "economic performance" rule). In the typical case, however, the deduction may be fully available in the same tax year as the year in which the income is recognized, which means that both parties may have no net income from the transaction, regardless of the valuation of the property or services exchanged.

The situation is somewhat different, however, if there is a personal element to the transaction. If a plumber repairs a music teacher's residential plumbing in exchange for piano lessons for the plumber's child, both parties recognize income, and in all likelihood neither party has an offsetting deduction. The procurement of piano lessons is probably a personal, and not a business, expense. Likewise, the repair of the plumbing in one's residence is probably a personal, and not a business, expense.

Hence, the tax avoidance potential is clearly much more of a problem when individuals are parties to a barter transaction.