How Does the IRS Treat Crowdfunding?
Platforms such as GoFundMe or Kickstarter have made it easy to raise funds through crowdfunding, however, the tax treatment of that money depends on whether its a gift. Whether the money is taxable or not, if you’ve raised more than $600 in a year via crowdfunding, the platform you used to raise that money must report that distribution to the IRS using Form 1099-K. Prior to 2022, the threshold for reporting crowdfunding payments was $20,000 raised from 200 transactions or more. Some states have different thresholds for requiring a 1099-K. Massachusetts, Mississippi, and Vermont require 1099-Ks for each taxpayer who gets at least $600 in donations. The threshold for Missouri is $1,200.
When Is Crowdfunded Money Not Taxable ?
Here are some scenarios where people involved with crowdfunding campaigns may not have to pay tax:
Money Raised Is a Gift
To better understand when crowdfunded donations are a tax-free gift, consider this example: Suppose Joe and Mary lost their home and possessions after a catastrophic home fire. They have two young children and don’t know where to turn, because insurance won’t cover the full extent of their losses or medical expenses. Mary’s friend Stella steps in and sets up a crowdfunding campaign to help the family, raising $30,000. This exceeds the 1099-K requirements. The crowdfunding platform sends them a copy of the 1099-K that it sent to the IRS. Assuming that Joe, Mary, and Stella didn’t give any of the donors anything in exchange for their money, the $30,000 can be considered a gift. It isn’t subject to taxes paid by the receivers of the gift.
Money is Raised For Someone Else
According to the IRS, if an organizer executes a crowdfunding campaign for someone else’s benefit and disburses all the funds to that person, the donations are not counted towards the organizer’s taxable income. In the example above, while Mary’s friend Stella organized the crowdfunding campaign but gave it all away to Mary and Joe, Stella does not need to pay tax on the money raised.
When Can Crowdfunding Money Be Taxable?
Here are two scenarios where resulting donations form a crowdfunding campaign are taxable:
Reward-Based Crowdfunding
The situation changes if Mary’s friend Stella gives some good or service in exchange for donations. If so, then she—or maybe Mary and Joe—might be expected to report any profits from the donations (minus expenses related to the rewards) as income. According to the IRS, if the payment proceeds primarily from “any moral or legal duty” or from “the incentive of anticipated benefit” of an economic nature, it is not a gift.” If the money you raise from crowdfunding isn’t a gift, it’s considered income. In that case, the IRS expects you to pay taxes on it.
Crowdfunding Donations From An Employer
If an employer contributes to a crowdfunding effort that benefits an employee, that money is considered as a part of the employee’s gross income and therefore needs to be paid tax on by the employee.
Crowdfunding for Your Business
Starting or operating a business with crowdfunded money isn’t usually a true gift. As such, it could be taxable income, but it depends on the details of the income. Suppose your new business is struggling to get off the ground. You resort to crowdfunding to raise money to keep it going until you begin to turn a profit. Maybe you offer donors the gadget you’ve invented as a gift in exchange for their money (reward-based crowdfunding). If you do, you will likely have to report the donation as business income, just like you would with any other sale. Maybe you effectively issue stock in your company, and donors will receive a share in your enterprise in exchange for their money. This second incentive is often referred to as “equity crowdfunding.” Any profit that results from crowdsourced donations isn’t technically “gross income” when it’s raised from equity crowdfunding. It’s technically an investment—you gave donors equity in your business in exchange for the donated money. That’s not taxable income for your business. Consider the intent of your crowdfunding. If the point is to generate funds for a project that would clearly be considered a trade or business outside of the crowdfunding context, then it will likely be considered taxable business income. You may not have to pay taxes on that income in some situations, though. The funds that your business spends on a project might be considered deductible business expenses. If they reduce your taxable income by the same amount as the donations, then the donations are likely offset by your business expenses. You wouldn’t end up paying federal income tax on the donations, even if they are technically taxable.
The Bottom Line
Crowdfunding sites or their third-party processors of funds will typically pay the individual who set up the account, not the ultimate beneficiary of the money. The crowdfunding organizer might end up receiving a Form 1099-K. It could be wise to consult a tax professional if that happens to you. You might be able to claim an “agency” relationship to eliminate responsibility for any taxes that might be assessed. Beneficiaries (not organizers) of crowdfunding sources should be prepared to show what was or was not offered or exchanged for the funds received. This is generally provable with campaign records.
