Money raised through crowdfunding may be taxable
New IRS guidance addresses the tax consequences of raising money through crowdfunding.
What is crowdfunding?
Crowdfunding is an increasingly popular method of raising money. Funds are typically raised by soliciting small individual contributions from many people through an electronic fund-raising platform, such as Kickstarter, GoFundMe, and Indiegogo.
Contributions are solicited for a wide variety of reasons, including:
- to fund businesses;
- for charitable donations; or
- for gifts.
Tax treatment of money raised through crowdfunding
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.
Thus, crowdfunding revenues generally are included in income if they are not:
- loans that must be repaid;
- capital contributed to an entity in exchange for an equity interest; or
- gifts made out of detached generosity and without any "quid pro quo."
The IRS notes that crowdfunded contributions to an employer are generally included in an employee's gross income when the employer distributes them to, or for the benefit of, the employee.
Reporting crowdfunded proceeds on form 1099-K, Payment Card and Third-Party Transactions
The crowdfunding organizer or its payment processor must report distributions of money raised on Form 1099-K, Payment Card and Third-Party Network Transactions, if:
- the money raised meets the reporting threshold; and
- contributors to the crowdfunding campaign received goods or serves for their contributions.
A crowdfunding website, organizer, or payment processor that must file a Form 1099-K with the IRS must also supply a copy to any individuals or businesses that received distributions meeting the reporting threshold.
For calendar years beginning after 2021, the filing threshold is met if, during a calendar year, the total of all payments distributed to a person exceeds $600, regardless of the number of transactions or donations. This is a big change from previous years, when a 1099-K was required only when the filer distributed more than $20,000 from more than 200 transactions or donations.
The substantial drop in the filing threshold is expected to greatly increase the number of 1099-K filings for tax years after 2021.
Form 1099-K can be confusing
The IRS cautions taxpayers that, in some cases, a person receiving a Form 1099-K for distributions of money raised through crowdfunding may not recognize the filer's name on the form. For example, the form will name the payment processor used by the crowdfunding website (instead of the crowdfunding website) as the filer on the form.
Individuals or businesses that do not recognize the filer's name should use the filer's telephone number to contact a person knowledgeable about the payments reported. This telephone number is listed on the form.
Crowdfunding requires good records
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.