Crowdfunding sites like GoFundMe, Kickstarter and Indiegogo make it easy to raise funds for everything from helping individuals with medical expenses to starting a new business. But if you're the beneficiary, you might find yourself with taxable income depending on how the IRS classifies the proceeds. Crowdfunding projects for individuals often lead to nontaxable income as long as certain conditions get met. However, crowdfunding for business purposes usually leads to taxable income.
Consider also: Can I Use Crowdfunding to Start My Business?
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Identifying Nontaxable Crowdfunding Income
When crowdfunding donations go to an individual, the IRS often classifies the proceeds as a nontaxable gift. However, the money must truly be a gift where donors contribute based on their generosity and not to obtain something in return. Further, the money needs to go to the named beneficiary. For example, if your brother starts a GoFundMe for your medical expenses, the donations will likely not be considered taxable income this tax year.
Another circumstance is when a qualified charitable organization starts a campaign on one of the crowdfunding websites. As long as the organization is tax-exempt per the IRS rules, charitable donations shouldn't be considered taxable income to that charity.
In addition, there's a possibility that some business-related crowdsourcing campaigns might not lead to taxable income if donors receive business equity – rather than a product or service – in return. However, this issue is complex and can lead to other tax implications later on.
Understanding Taxable Crowdfunding Income
Crowdfunding donations usually become taxable business income when they're for a business purpose or otherwise provide backers with a valuable item in return. For example, if you're starting a business and offer backers your new product or even a t-shirt in exchange for contributions, then you'll likely pay taxes on the proceeds minus relevant expenses.
In some cases, an individual may even end up with taxable income from a crowdsourcing campaign designed to help them. For example, if you're an employee and the business owner makes a fundraising campaign to help you, the tax laws specify this would be added to your gross income.
While these situations are the most common for taxable crowdfunding income, you should keep in mind such income should be considered taxable unless the IRS tax code says otherwise. So, it's best to speak with a tax professional about your situation.
Consider also: Why We Pay More for Crowdfunded Products
Tax Implications for Crowdfunding Donors
While you can't deduct contributions to an individual or business, those to a qualified charitable organization are tax-deductible. This usually means itemizing to take advantage, but the IRS allows deducting up to $600 in cash donations for 2021 for non-itemizing-taxpayers.
If your donations to an individual exceed $15,000 in 2021 (or $16,000 in 2022), you'll also be liable for a gift tax return. However, you wouldn't pay any gift tax until you exceed your lifetime exclusion, which is several millions of dollars.
Consider also: Gift Tax: What Is it & Other Frequently Asked Questions
Crowdfunding donations usually become taxable business income when they're for a business purpose or otherwise provide backers with a valuable item in return.
Tax Implications for Crowdfunding Beneficiaries
The crowdfunding platform may mail you a Form 1099-K that documents the proceeds, especially if the campaign involved goods or services. However, you could get it for any campaign, so it doesn't always mean you've got taxable income. But if the crowdfunding campaign proceeds are taxable, then you'll need to list them on your federal and state income tax returns and pay any taxes due.
For example, if you're a small business, you'd likely report it on your Schedule C and list any relevant business expenses that could help offset the tax burden. In addition, you'd need to pay any local and state sales tax due in a case where donors received products in return. However, if an employer raised money for you as an employee, the proceeds may already be included in your income on your W-2 that year, and the taxes are already withheld.
If in doubt, always seek the advice of a tax professional so that you don't avoid including taxable income and thus become subject to penalties and other actions from the IRS.
- Williams CPA: Tax Consequences of Crowdfunding
- IRS: 1099-K Reporting Requirements for Payment Settlement Entities
- IRS: Money Received Through “Crowdfunding” May Be Taxable; Taxpayers Should Understand Their Obligations and the Benefits of Good Recordkeeping
- H&R Block: Crowdfunding Taxes: Why Entrepreneurs May Owe the IRS
- Baker Institute: Tax Considerations of Crowdfunding