Thursday, July 20, 2006

Paperclips and Income Taxes

Last month I posted about a New York Times story of a guy looking to trade a Maurice Sendak watercolor for an apartment in Manhattan, and I noted that he (and the author of the Times's story) seemed to be overlooking the income taxes he would have to pay on the trade. I had the same thought when reading about Kyle MacDonald, the young blogger who has traded his way up from "one red paperclip" to a house (with intermediate trades along the way for, among other things, a pen, a ceramic knob, a camping stove, a generator, a beer keg, a Budweiser sign, a snowmobile, an afternoon with Alice Cooper, and a role in Corbin Bernsen's new movie). The Tax Law Prof agrees there's a potential tax problem (or would be, if MacDonald were American): "If MacDonald were subject to U.S. tax (he is a Canadian), wouldn't each exchange generate short-term capital gain, since the swaps do not appear to qualify for § 1031 like-kind exchange treatment? Wouldn't this be simple barter income? Would MacDonald be subject to the barter exchange reporting rules?" Here is a story at MacDonald's blog is here.