Taxes on Crowdfunding – Do You Owe the IRS?
Raising money online through third-party backers, or crowdfunding, is an emerging and widespread way to raise a little capital. Through crowdfunding, raising money for a trip, medical expense, or startup, is often a quicker and easier alternative than conventional fundraising.
How it Got Started
The alternative financing option emerged in the early 2000s with a website called ArtistShare, where music fans could fund their favorite creative artists. In its infancy, the crowdfunding sites were gamified – that is they set a fundraising goal, and if that goal was not reached they would get a refund for their original donation. Since then, sites like Kickstarter GiveForward, and GoFundMe have raised billions of dollars worldwide for various causes and campaigns.
Taxes and Crowdfunding
You may wonder “Are those billions of dollars of donations considered taxable by the IRS?” Here is greater detail about how you should claim crowdfunding monies on your taxes:
Tax law around crowdfunding is still grey area. So far, the IRS has been silent on how taxpayers should address crowdfunding on tax returns. Without official guidance, the proper tax treatment likely hinges on two factors:
- The campaign organizer’s intent and factual situation, and
- Whether backers receive goods or services in exchange for their contributions.
Although the funds may come in through a single platform, tax implications can be surprising for taxpayers who think each donation is one in the same.
One thing is pretty clear: If a campaign organizer’s intent is to generate funds in exchange for goods or services, and if viewed outside the context of the crowdfunding website was seen as such, the raised funds should be considered taxable business income, under Internal Revenue Code § 61(a).
Crowdfunding websites will often issue a Form 1099-K, Payment Card and Third Party Network Transactions, to the campaign organizer receiving the funds. How taxpayers should report the amount on this form on their tax returns varies depending on the nature of the payment. Err on the side of caution: Since the IRS implemented the Form 1099-K, they have sent more notices to taxpayers who received the Form 1099-K, but did not report the income on their returns.
“Life Event” Fundraising
Life event crowdfunding websites like Indiegogo and YouCaring allow individuals to raise funds to cover the costs of various life events, such as a bucket-list trips or medical bills. These campaigns typically have no resemblance to business activities. Donors typically don’t receive anything in exchange for their contributions, thus the proceeds received are not considered taxable income. (Under § 102(a), gross income does not include the value of property acquired by gift.)
If the donor didn’t receive anything in exchange for giving the money, the recipient can likely exclude the income from his or her taxable income because it was a gift. In other words, to be a gift, the donor must give “something for nothing.” These same rules apply when the contribution is between relatives or friends.
No matter how charitable the intentions of crowdfunding campaigns may be, contributions for individuals or organizations that aren’t qualified charitable organizations, such as §501(c)(3) entities, will not qualify as deductible charitable contributions, regardless of the circumstances. Taxpayers can deduct charitable contributions only when they’re made to qualified charitable organizations that are not intended to benefit specific/named individuals.
The Gift Tax Limit
Lastly, a contribution to an individual’s crowdfunding campaign that is a gift and doesn’t qualify for a charitable deduction may be subject to gift tax rules if it’s more than $14,000 – the annual gift-tax exclusion limit per individual. If a backer gifts more than that amount to an individual in a given year, the backer may have to file a gift tax return.
Parting Words on Taxes on Crowdfunding
When it comes to crowdfunding, taxpayers and their Tax Advisors should track and document any transactions made, and report the contribution accordingly. For more information on crowdfunding tax implications, view the following article, “Crowdfunding: One platform with many tax results” from The Tax Institute.
There is no doubt that tax can get complex, which is why you should lean on the support of a trusted advisor. Find a Tax Advisor in your area now.