How to Calculate Gain From Trade

By Carter McBride

Whenever you trade a good or service for another good or service, you may need to calculate gain on the trade. This gain, is then taxed. The first step in determining the gain, is to determine if you have a like-kind exchange or not. If you do not have a like-kind exchange, then you have bartering income. If you do have a like-kind exchange, then you may not have any gain. Like-kind exchanges occur when you trade one good for a similar good, for example a car for a car.

Non-Like-Kind Exchange

Determine what is being traded and then if it qualifies as a like-kind exchange. A like-kind exchange is when you trade something for something similar, like a tractor for a tractor. Additional stuff can be traded in a like-kind exchange, for example cash. Anything that is not like-kind in the trade is known as boot. There are some exceptions to like-kind exchanges, however these are rare. For example, trading livestock of different sexes is not considered like-kind. If you think these rare exceptions may apply to you, then you should consult a CPA or look at the Internal Revenue Code 1031.

Calculate your amount realized if it is not a like-kind exchange. The amount realized is the fair market value of everything you receive. For example, assume you receive $50,000 and a tractor whose fair market value is $20,000 in exchange for a building that cost you $100,000 and has $80,000 of depreciation. Your amount realized is $50,000 plus $20,000, which equals $70,000.

Calculate your adjusted basis in anything given up. Adjusted basis is the cost of the property minus any depreciation plus any capital expenses that add to the basis. In the example, the adjusted basis of the property given up is $100,000 minus $80,000, which equals $20,000.

Subtract your adjusted basis in the property given up from the amount realized to calculate gain or loss. In the example, $70,000 minus $20,000 equals a gain of $50,000.

Like-Kind Exchange

Determine what is being traded and then if it qualifies as a like-kind exchange. A like-kind exchange is when you trade something for something similar, like a tractor for a tractor. Additional stuff can be traded in a like-kind exchange, for example cash. Anything that is not like-kind in the trade is known as boot. There are some exceptions to like-kind exchanges, but these are rare. For example, trading livestock of different sexes is not considered like-kind. If you think these rare exceptions may apply to you, then you should consult a CPA or look at the Internal Revenue Code 1031.

Determine what boot is given up by both parties. Remember boot is anything that is not like-kind. For example, assume you trade a tractor worth $20,000 and $5,000 in cash for a tractor worth $10,000 and $10,000 in cash. In the example, the $5,000 and $10,000 in cash is boot.

Recognize a gain to the extent of the boot received. In the example, the boot is $5,000 given up and $10,000 received, so you have a $5,000 gain because you received $5,000 more in cash. No gain or loss is recognized on the like-kind properties.