Paul L. Caron

Wednesday, June 14, 2006

Tax Consequences of One Red Paperclip

Paper_clipThomas Zupanc sent in a wonderful item about the tax consequences of Kyle MacDonald's quest to barter his way from one red paperclip to a house:

My name is Kyle MacDonald and I am trying to trade one red paperclip for a house. I started with one red paperclip on July 12th, 2005 and I am making a series of trades for bigger or better things. My current item up for trade is one role in a movie.

He has made 13 exchanges thus far, all chronicled on his blog.  The exchanges include an afternoon with Alice Cooper and a role in Corbin Bernsen's new movie.  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 McDonald be subject to the barter exchange reporting rules? Comments are open.

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What if I trade the house away for a paperclip?

Posted by: kyle macdonald | Jun 20, 2006 2:23:22 PM

Not a chance for 1031 treatment. IRS will say the stuff isn't "held" for investment or use in a trade or business, and this stuff won't be like kind.

Posted by: Joe Kristan | Jun 15, 2006 6:55:09 AM

I would take the aggressive approach and argue that the exchanges do qualify for 1031 treatment. If Old MacDonald is a writer or entertainer he is using the property to produce material for his trade. We could win on this point. Of course, that is only half the battle. It may be difficult to establish some of these exchanges are of like kind assets (eg, a snow globe and an acting role). However, given IRS' liberal interpretations of "like kind" it may be worth a go.

Posted by: Matthew | Jun 14, 2006 8:39:27 PM