Donations to individuals can fall into a gray area in tax law. Depending on the circumstances, a donation you have received may qualify as a gift, an investment or taxable income. If it's the latter, then you'd have to report it on your tax return. The lines between these categories are blurry, and the Internal Revenue Service looks at each case individually, so consider consulting a tax professional for specific guidance about your situation.
The IRS Position
As of late 2014, the IRS had not issued definitive guidelines on the tax treatment of donations to individuals. Tax expert Eva Rosenberg told the International Business Times that such guidance may have to come from the courts. In the meantime, the official position, as summed up by an IRS official speaking to the Times, is that donations to an individual are taxable income if they are not gifts, loans or equity investments. That official also noted that the IRS looks at such donations on a case-by-case basis.
What Makes a Gift
The IRS defines a gift as any transfer of money or property for which the giver doesn't receive "full consideration" in return. Full consideration essentially means getting one's money's worth. If someone gives you $100 just because she wants to give you $100, and you provide nothing in return, then that $100 is a non-taxable gift. If you give her $10 worth of value in return, then she's given you a $90 gift.
When a donation is a gift, gift taxes may apply -- but the recipient does not have to pay them. Gift taxes are the responsibility of the person giving the gift; recipients do not report them on their taxes. In general, a person can give any individual a certain amount each year without triggering gift tax; as of 2014, that amount was $14,000. Certain exceptions exist. Donations to pay someone's medical or educational expenses are not subject to the annual limit, as long as they're given directly to a health-care provider or school, rather than to the person who will benefit.
Investments and Loans
If you're getting a business or other moneymaking venture off the ground and someone gives money in exchange for equity -- that is, a share of ownership -- or a cut of the potential profits, then the donation is likely an investment or "capital contribution." It's not taxable income to you, and you wouldn't report it on your personal tax return. Similarly, loans are not taxable income because you will be paying them back; if you fail to repay, though, then the money becomes taxable.
The tax status of donations has gotten considerably more complicated with the rise of "crowdfunding" -- online appeals for money, in which strangers donate cash to entrepreneurs or people in need. In these situations, the purpose of the donation is important. If someone is sending you money to start a business or develop a product but is not getting equity, then the donation is probably going to be taxable income that you must report. That's why business-focused crowdfunding services such as Kickstarter and Indiegogo say that, in general, you should assume donations are taxable. On the other hand, money sent to help you in time of need, with no expectation of consideration, may well count as a gift. This is the position of GoFundMe, a crowdsourcing site that focuses on individuals rather than enterprises. However, all the sites urge "crowdfunders" to consult a tax professional.
- Internal Revenue Service: Frequently Asked Questions on Gift Taxes
- International Business Times: Crowdfunding - Income or Gift?
- U.S. News & World Report: How to Raise Money for Medical Bills
- MarketWatch: Should Kickstarter Pledges Be Taxed?
- Kickstarter: Kickstarter and Taxes
- GoFundMe: Common Questions