Did you know that “crowdfunding” may be taxable? “Crowdfunding” is when a project or venture is funded by many small amounts of money raised from a large number of people. This typically takes place online. Often times, “crowdfunding” websites are used. These include sites such as Kickstarter, Indiegogo, Crowdfunder, Donorbox, Paypal, Facebook Fundraising, and GoFundMe.
According to 26 USC 61, gross income means any income realized in any form (money, property, or services) from whatever source derived unless excluded by law. Generally, gifts are not required to be reported to the IRS and income tax is not required to be paid.
If a Taxpayer donates to a crowdfunding campaign out of generosity without expecting anything in return, the donation typically will be considered a gift and will not be included in the gross income of the intended recipient. However, not all contributions to “crowdfunding” campaigns are gifts, so in some situations, payments made toward a “crowdfunding” endeavor may be taxable.
Often times, the organizer for “crowdfunding” uses a 3rd party website to collect contributions. In these cases, the website or its payment processor will report distributions of money collected via a Form 1099-K, Payment Card and Third-Party Network Transactions when they have an IRS obligation to do so (when the total of all payments distributed to a person exceeds $600, regardless of the number of donations/transactions). This reporting generally goes to the IRS and to the organizer or the individual or business who directly received the funds.
At this point, the IRS will be looking for this income to be reported on the tax return of the person who received the form. As a result, the recipient should explore whether he or she has an obligation to pay taxes on the funds received so that he or she may properly file their tax return.
If an organizer solicited contributions on behalf of another, those funds likely do not need to be included in the organizer’s gross income if the funds were distributed to the individual or business for which the money was raised.
Even for the intended recipient of the “crowdfunding” efforts, if the donations were made in the name of detached and disinterested generosity and the contributors expect nothing in return, it is likely that these contributions are gifts and do not need to be included in the gross income of the recipient. Contributors should note that gift tax rules will then apply to their gift.
Now, when would a contribution to a “crowdfunding” effort be taxable? The IRS has said that contributions by an employer to, or for the benefit of, an employee are generally taxable to the employee. If the contributor receives something of value in return, the contribution is likely taxable income. In this situation, you may also have a State and local sales tax obligation. Of course, businesses can deduct expenses from income, so if all funds received were spent developing a product, net income is still likely $0.
If you have organized a “crowdfunding” initiative on behalf of another individual or business or if you have received funds from “crowdfunding” efforts as the beneficiary, you should keep complete records of all funds, facts, and circumstances surrounding the fundraising efforts for tax purposes and to determine taxability, should consult with your Tax Professional. Need help? Contact Bryson Law Firm, LLC today.