Crowdfunding is a mechanism whereby one party solicits something of value from many people on behalf of themselves or another party. The Internal Revenue Service (IRS), understandably, wants to know whether that "something of value" is taxable income.
Generally, anything you receive in exchange for goods or services is taxable unless it is specifically exempted by law. Taxable income must be reported on your tax return and is subject to the payment of income tax. Non-taxable income may still have to be reported but is not subject to taxation.
Crowdfunding is relatively new and can be a source of confusion when it comes to taxes. That's partly because there are different types of crowdfunding and the process is used for different reasons, including raising money for a cause as well as raising capital for a new business.
- Money received from a crowdfunding campaign is generally considered income to the recipient unless excluded by law.
- Most crowdfunding websites and campaigns are required to report distributions on Form 1099-K if they meet thresholds outlined in tax law.
- Anyone required to file a 1099-K must also provide a copy to the recipient(s) of campaign funds.
- Contributions to a crowdfunding campaign made with "disinterested and detached generosity" and with no expectation of reward are considered non-taxable gifts to the recipient.
- Contributions made as an investment or loan with the expectation of a ROI are considered income to the recipient.
- Crowdfunding organizers and recipients of crowdfunding proceeds should keep records of all "facts and circumstances" surrounding the campaign and funds that are raised.
The Role of IRS Form 1099-K
Most crowdfunding websites (e.g., Kickstarter) are required to report distributions of money raised if the amount distributed meets certain reporting thresholds. For this, the website files IRS Form 1099-K Payment Card and Third Party Network Transactions. If the website is required to file a 1099-K, it must also furnish a copy of that form to the person to whom the distributions were made.
If a crowdfunding website is required to file Form 1099-K to the IRS, it must also provide a copy of that filing to the person(s) or organization(s) to whom the funds were distributed.
Importantly, the American Rescue Plan Act makes it clear that the crowdfunding website is not required to file Form 1099-K or furnish a copy to the recipient if the contributors to the crowdfunding campaign do not receive goods or services for their contributions.
For tax year 2021, the threshold for a crowdfunding website to file and furnish a Form 1099-K was met if, during calendar year 2021, the total of all payments distributed to a person exceeded $20,000 resulting from more than 200 transactions or donations—and contributors received goods or services. Subsequently, for calendar years beginning after December 31, 2021, the payment threshold is now $600 and one or more transactions.
If you receive a Form 1099-K you may not recognize the name of the filer that appears on the form. That's because the filer could be the crowdfunding website or its payment processor. In that case, you can use the telephone number listed on Form 1099-K to obtain details about the filing.
Box 1 on Form 1099-K shows the gross amount of distributions made to you during the calendar year. This does not mean you, as the recipient of a Form 1099-K, must pay taxes on that amount. If you receive Form 1099-K and do not report the amount on your tax return, the IRS may contact you and ask why. You will have an opportunity to explain why you did not report the distribution.
Tax Treatment of Crowdfunding Proceeds
Recall that under federal tax law, your gross income consists of all income from all sources, including property and services, unless specifically excluded from gross income by law. In most cases, for example, something you receive as a gift is not considered income to you and therefore not includible.
Crowdfunding monies are generally considered income unless you convince the IRS otherwise.
If a crowdfunding website solicits contributions or investments on behalf of others and distributes the money raised to those people, the crowdfunding site isn't required to include the money distributed in its gross income.
If contributions to a crowdfunding campaign are made as a result of contributors' "detached and disinterested generosity," and without the contributors receiving or expecting to receive anything in return, the amounts are considered gifts and therefore not includible in your gross income as the recipient of those funds.
If your employer contributes to a crowdfunding campaign set up on your behalf, that contribution would likely be included in your gross income. Similarly, if you launch, or have launched for you, a crowdfunding campaign for your new business and receive money in the form of investments that investors expect to be rewarded for, that is income.
Consult a trusted tax professional for information and advice if you are unsure about any amounts you receive from a crowdfunding campaign.
Recordkeeping for Money Raised Through Crowdfunding
If you are the organizer of a crowdfunding campaign or the recipient of proceeds (or both) the IRS advises that you keep complete and accurate records of all facts and circumstances surrounding the fundraising campaign and disposition of funds for at least three years. Note that crowdfunding portals are regulated by the Securities and Exchange Commission (SEC) and FINRA and those regulations require detailed crowdfunding records to be kept for five years.