Over the past few years, crowdfunding – or crowdsourcing – has been a simple and effective alternative to loans, venture capital and conventional fundraising. Through sites such as Kickstarter, IndieGoGo, and GoFundMe, raising money for creative projects, start-up businesses, or personal causes can be achieved in just a couple of clicks. But since billions of dollars have been raised via the crowdfunding craze, the IRS is starting to find a way to get its share of the pie.
Whether you’ll be taxed depends on your reasoning for launching a campaign and if contributors receive anything in exchange for their donations. Let’s take a look at the tax implications of crowdfunding, then decide if this trend is the right move to fund your idea or cause.
Types of Crowdfunding Revenue
The money generated through crowdfunding usually falls into one of three categories:
If you give charitable contributions to a specific cause on a crowdfunding site, you may be able to receive a tax deduction. However, there is a caveat. You can only deduct charitable contributions from your tax bill if you donated to a qualified organization, such as a 501(c)(3) charity. To verify if your preferred charity is eligible to receive tax-deductible donations, visit the IRS website.
Let’s say you start a campaign via GoFundMe because your house flooded and you need money to get back on your feet. In this instance, your backers would be contributing gifts rather than charitable donations. The reason is because you are not a qualified charitable organization and your backers do not receive anything in return for their contributions. Charitable donations and gifts may seem like interchangeable terms, but it’s important to know that there is a difference.
If your crowdfunding revenue consists of only gifts, then you do not have to pay taxes. In case of an IRS audit, it is imperative to have supporting documentation to substantiate your non-taxable income.
On the other hand, you will be subject to the gift tax if you contribute funds totaling more than $14,000 for the tax year. The only gifts that are not taxable are:
- Gifts to your spouse.
- Gifts to a political organization.
- Tuition and medical expenses you pay for someone.
If you’re organizing a crowdfunding campaign with the intent to generate money in exchange for goods or services, then the money you receive from contributors would be considered taxable income. Usually, campaign organizers set contribution tiers, ranging from low to high, as an incentive for people to finance their business venture. The higher the contribution, the better the reward will be for the contributor.
Though, in the eyes of the IRS, this type of crowdfunding structure – also known as reward-based crowdfunding – is no different than business-to-consumer sales. Depending on which state you and your backers live in, you might have to pay sales tax as well.
Do I Receive a Tax Form?
You might receive Form 1099-K in the mail if you organized a reward-based crowdfunding campaign and garnered more than 200 annual transactions totaling at least $20,000. The purpose of this document is to help the IRS track online sales that small businesses usually leave unreported. Kickstarter, GoFundMe, and other crowdfunding sites use services such as PayPal and Amazon Payments to process the payments and remit the form to you and the IRS.