Is Crowdfunded Money Taxable? What You Need to Know
We've all seen the posts on social media asking for financial support. Whether it's for a charitable cause, help with unexpected emergencies, or even money for a vacation, more and more people are turning to crowdfunding to bolster their coffers. Many entrepreneurs have also used this mechanism to finance a new business venture or pay for upgrades and expansions.
Crowdfunding is a relatively new phenomenon and there are lingering questions about its taxability. If you are raising capital for your new business through crowdfunding, here's what you need to know.
What is crowdfunding
Crowdfunding is the practice of raising funds, either for themselves or for another party, by soliciting contributions from the public. Popular sites such as Indiegogo, GoFundMe, and Kickstarter have made it easier for people to help others and considerable sums of money are funneled into campaigns.
But how much money is generated each year? According to financial company Fundera, over $17 billion is generated annually through crowdfunding in North America alone. This naturally raises the question: Is crowdfunded money taxable?
The IRS says that any income, whether in the form of money, property, or services, is taxable unless specifically excluded by law. It's important to note that taxpayers are required to report all income, taxable or not, on their federal returns.
While amounts received as a gift are generally not considered taxable income, donations can become subject to taxes if the donors receive something in exchange for their contribution, such as a product or a service.
However, when it comes to income from crowdfunding, the tax consequences depend on the facts and circumstances of each case.
What's Form 1099-K
Crowdfunding platforms and payment processors are mandated to report contributions received if the amount meets certain reporting thresholds. In that case, the platform files a Form 1099-K (Payment Card and Third Party Network Transactions) with the IRS. The platform must also furnish a copy of that form to the recipient of the contributions.
However, the American Rescue Plan Act has stated that crowdfunding platforms and payment processors are not required to file a Form 1099-L if the donors do not receive anything in return for their contributions.
Prior to tax year 2022, the crowdfunding reporting requirement kicks in if the total of all payments distributed to a person exceeded $20,000 in gross payments resulting from more than 200 transactions or donations, and the donors received goods and services in return for their contributions.
Beginning tax year 2022, the reporting threshold has been lowered to $600, regardless of the number of transactions or donations.
If you receive a Form 1099-K, do not be alarmed if you do not recognize the filer's name on the form. There are instances when the payment processor, rather than the crowdfunding platform, will issue the Form 1099-K. In that case, they will be named as the filer of the form. If you require more information about the filer, you can contact the filer's telephone number listed on the form.
Box 1 on the Form 1099-K shows the gross amount of the distributions made to you during the calendar year, but that doesn't mean that it's taxable. As previously mentioned, the taxability of income from crowdfunding depends on the facts of the case. If you receive a Form 1099-K and elect to not report the amount on your tax return, the IRS may reach out to you for an explanation. You will then have the opportunity to explain your case.
Tax implications of crowdfunding income
To explain how crowdfunding proceeds are taxed, we must revisit the definition of gross income. The IRS defines gross income as "all income from whatever source derived unless it is specifically excluded from gross income by law." Generally, gifts and donations are not considered income and are therefore excluded.
If you have organized a crowdfunding campaign on behalf of others, the contributions to the campaign are excluded from your gross income provided that funds are further distributed to the intended recipient.
If the contributions to a campaign are made as a result of the donors' "detached and disinterested generosity", and without them receiving or expecting anything in return, the amounts are considered gifts and are therefore excluded from your gross income.
Crowdfunding for business
There are instances when the proceeds from a crowdfunding campaign become taxable income.
Let's say you've started a business, but growth has stalled. You start soliciting contributions from the public to keep your business going, at least until becomes self-sustaining. To attract donors, you offer goods and services in exchange for contributions. In this scenario, the proceeds from this campaign have to be reported as business income.
If you're not sure if your crowdfunded income is taxable, you may want to consult a tax professional for more information.
The importance of good recordkeeping
All entities that receive contributions from crowdfunding, whether an individual person or a business or organization, are required to maintain complete and accurate records of the fundraising and disposition of funds for at least three years.