Crowdfunding is an increasingly popular method of raising money online. Funds are typically raised by soliciting small individual contributions from many people through an electronic fund-raising platform to fundraise for a business, for charity, or for gifts. It’s important to know that money raised through crowdfunding may be taxable.
The income tax consequences of money raised through a crowdfunding effort depend on all the facts and circumstances. Crowdfunding proceeds are generally included in gross income, unless federal income tax law expressly excludes them, such in the case of:
- loans that must be repaid;
- capital contributed to an entity in exchange for an equity interest; or
- gifts made from detached generosity and without any “quid pro quo.”
Some money raised through crowdfunding may be considered a gift.
Under federal tax law, gross income includes all income from any source, unless it’s excluded from gross income by law. In most cases, gifts aren’t included in the gross income of the person receiving the gift. Here’s what people involved in crowdfunding should know:
- If a crowdfunding organizer is raising money on behalf of others, the money may not be included in the organizer’s gross income, as long as the organizer gives the money to the person for whom they organized the crowdfunding campaign.
- If people donate to a crowdfunding campaign out of generosity and without expecting anything in return, the donations are gifts. Therefore, they will not be included in the gross income of the person for whom the campaign was organized.
- However, not all contributions to crowdfunding campaigns are gifts and may be taxable.
- When employers give to crowdfunding campaigns for an employee, those contributions are generally included in the employee’s gross income.
Taxpayers may want to consult a trusted tax pro, as US Tax Consultants, for information and advice regarding how to treat amounts received from crowdfunding campaigns.
People may receive Form 1099-K for money raised through crowdfunding.
The crowdfunding website or its payment processor must file Form 1099-K, Payment Card and Third Party Network Transactions with the IRS if:
- The amount raised is more than $600, in gross payments, regardless of the number of transactions or donations.
- Contributors to the crowdfunding campaign receive goods or services for their contributions.
If a Form 1099-K is filed, the crowdfunding organizer or the beneficiary of the fundraiser will receive a copy, depending on who received the funding directly from the crowdfunding website. Box 1 on the Form 1099-K will show the gross amount of the distributions made to a person during the calendar year, but issuance of a Form 1099-K doesn’t automatically mean the amount reported on the form is taxable to the person receiving the form. Receiving a Form 1099-K doesn’t automatically mean the amount shown is taxable. However, if the taxpayer doesn’t include the distributions from the form on their tax return, the IRS may contact the recipient for more information. The recipient may need to explain why the crowdfunding distributions weren’t reported.
Recordkeeping for money raised through crowdfunding requires good records
People who run crowdfunding campaigns or receive money from one should keep complete and accurate records related to both fundraising and fund distribution about the campaign and the disposition of funds for at least three years.
Crowdfunding organizers and recipients of crowdfunding proceeds must keep good records. Complete and accurate records related to both fundraising and fund distribution should be maintained for at least three years.