Crowdfunding campaigns have soared in popularity with the advent of websites such as Kickstarter, GoFundMe, Indiegogo and more. Through these sites and social media people are able to raise money to fund a new business venture, pay off medical bills, create a new product, raise money for charity, and just about anything else you can think of. These crowdfunding sites have allowed individuals and businesses raise billions of dollars each year – so do you have to pay taxes on that?
The IRS has answered this questions with a maybe. They said that all facts and circumstances surrounding a crowdfunding effort must be taken into account to determine a taxpayer’s obligations. Let’s explore some common purposes for crowdfunding campaigns and their tax obligations:
- Business Venture If the purpose of the campaign is to generate funds in exchange for goods or services then the funds raised are taxable income. My mom recently participated in a crowd funding campaign for a counter top crushed ice maker. She received the ice maker at a reduced price before it was available for retail to the public as a reward for “donating” to the campaign. The money these organizer’s raised for their ice maker project is taxable income. The crowdfunding website will issue a 1099-K, as required by the IRS, for any project with $20,000 in gross volume and 200 or more transactions per year. However, even if you don’t receive a 1099-K you may still have tax obligations.
- Fundraising Many campaigns are started with the sole purpose of raising money and offer the donor nothing in exchange for their contribution. The money an individual raises in this situation can be considered a gift and therefore may not be taxable. If a neighbor’s house burns down and you start a campaign to help cover the cost, the donations are most likely considered a gift and will not be taxable income for the neighbor. Keep in mind there is a gift limit of $14,000 per individual or $28,000 per couple each year and per donee. A gift that is in excess of that amount is subject to a gift tax which the donor must report and pay.
- Charitable Donation A taxpayer can deduct a charitable donation only when made to a qualified charitable organization, such as a §501(c)(3) entity. Donations that are not made to qualified charitable organization, no matter how charitable the cause, cannot be deducted. That donation you made to your friend’s crowdfunding campaign she started to help pay for her aunts medical bills from cancer treatment might earn you kudos, but won’t give you a tax deduction.
When creating a crowdfunding campaign it would also be wise to look at any possible tax liabilities that may arise. Depending on the purpose of your campaign a good CPA or bookkeeping service would be helpful in determining all your state and federal tax obligations, including sales tax.