Requesting financial assistance from others when faced with difficult circumstances is nothing new, but the internet has given it a whole new meaning. GoFundMe, Kickstarter, GiveForward, and Crowdfunder are just a few of the sites that allow you to help people by simply tapping your phone. Since its start, GoFundMe has purportedly attracted more than 50 million donors who have raised more than $5 billion. First of all, the Internal Revenue Service (IRS) gets excited whenever money changes hands, so it's only natural to wonder if you'll have to pay taxes on this money whenever it comes in. It all depends on whether the money was given to you because of someone's good intentions or because you contributed anything in return. Here's all you need to know about when and how taxes apply to donations made through crowdsourcing.
Important Points to Remember
- If you raise more than $20,000 in a year through more than 200 transactions, the crowdfunding site will typically file a 1099-K with the IRS to report the income.
- If you raise money through crowdsourcing and don't get anything in return, it's deemed a gift and isn't taxable.
- Donations that are rewarded in return for their contributions are considered taxable income.
- If you raise funds for a business endeavor, the project's costs may be used to offset some or all of your taxable income.
How Does the Internal Revenue Service Handle Crowdfunding
The IRS didn't really address crowdfunding until 2016, when it issued Information Letter 2016-0036. The letter does not make any new requirements for how to handle crowdfunded money, but it does highlight key elements that may assist people in assessing whether their donations come under another portion of the IRS code (IRC). It all boils down to how those IRC regulations are interpreted. The letter's major point is that donations are only taxable income if the giver receives something in return for their gift, such as a service or a commodity. If not, as long as you're a private individual and not a business, they're nontaxable gifts. If the donations exceed an IRS threshold, the crowdfunding website is required to report distributions to the crowdfunding campaign's organizer, who subsequently distributes the funds to the campaign's beneficiary, on IRS Form 1099-K. The benchmarks are more than $20,000 in transactions and more than 200 transactions in a calendar year. Some states have varying requirements for a 1099-K. Massachusetts, Mississippi, and Vermont all demand 1099-Ks for any taxpayer who receives at least $600 in donations. Missouri has $1,200. barrier. Receiving a 1099-K does not indicate that the funds are taxable or reportable as income. It's still a question of the nature of the fundraising campaign and whether or not the donor receives anything in exchange for their donation.When Is Crowdfunding Money Considered a Gift by the IRS
To better understand when crowdfunded gifts are tax-free, consider the following scenario: Assume Joe and Mary's home and belongings were destroyed in a devastating fire. They have two young children and are unsure where to turn because their insurance will not cover all of their losses or medical expenses. Mary's family steps in and establishes a crowdfunding account to assist the family, which raises $30,000 from 201 people. This goes above and beyond the 1099-K requirements. They receive a copy of the 1099-K that was sent to the IRS by the crowdfunding platform. The $30,000 can be deemed a gift if Joe, Mary, and the family did not give any of these 201 people anything in exchange for their money. It is not subject to the taxes that the recipients of the gift must pay. In Information Letter 2002-0112, dated April 15, 2002, the IRS stated the following about gifts: A gift is made "out of compassion, respect, admiration, charity, or comparable impulses" and comes from a "detached and disinterested generosity." The IRS has stated that it may not be necessary to submit a Form 1099-K if the money contributed qualifies as a gift or donation, according to WePay, a third-party corporation that distributes the campaign funds collected by crowdfunding sites.Crowdfunding with a Reward System
If Mary's sister provides a good or service in exchange for donations, the situation changes. If that's the case, she—or perhaps Mary and Joe—might be required to disclose any earnings from the donations as income (minus any expenses associated with the awards). According to the Internal Revenue Service, It is not a gift if the money is made solely to fulfill "any moral or legal obligation" or to provide "an economic incentive of anticipated profit." It's considered income if the money you raise through crowdfunding isn't a gift. The IRS will expect you to pay taxes on it in that scenario. Using Crowdfunding to Grow Your Company Starting or running a business with money raised from the crowd is rarely a true gift. As a result, it may constitute taxable income, depending on the specifics of the income. Assume your new company is having trouble getting off the ground. You turn to crowdsourcing to raise funds to keep the business afloat until it starts to make money. Perhaps you can give them your invention as a present in exchange for their money (reward-based crowdfunding). If you do, the donation will almost certainly have to be reported as business income, just like any other transaction. Perhaps you can effectively issue stock in your company, and in exchange for their money, donors will obtain a share of your company. "Equity crowdfunding" is a term used to describe the second incentive. When money is raised through equity crowdfunding, any profit made from crowdsourced donations isn't strictly "income." In exchange for the given funds, you gave people stock in your business; therefore, it's technically an investment. That isn't taxable revenue for your company. If you pay yourself using donated money, you must report it as income on your personal tax return. Consider the goal of your crowdsourcing campaign. If the goal is to raise money for a project that is clearly a trade or business outside of the crowdfunding arena, it will almost certainly be considered taxable business income. However, in other cases, you may not have to pay taxes on that income. The money spent on a project by your company could be deemed deductible business costs. If your business expenses lower your taxable income by the same amount as the gifts, the donations are likely to be offset. Even if the donations are technically taxable, you would not have to pay federal income tax on them.Final Thoughts
Crowdfunding sites or their third-party fund processors usually pay the person who created the account, not the end beneficiary of the cash. A Form 1099-K may be sent to the crowdfunding organizer. If this happens to you, it's a good idea to seek advice from a tax specialist. You might be able to claim an "agency" relationship to absolve yourself of any potential tax liability. Beneficiaries of crowdfunding sources (rather than organizers) should be prepared to demonstrate what was or was not offered or exchanged for the cash received. This is usually verifiable through campaign records. Frequently Asked Questions (FAQs) Is it possible to claim a crowdfunding donation as a tax deduction Individual gifts made through a crowdfunding platform are not deductible. However, whether you donate directly or through a crowdfunding platform, donations to properly recognized and certified charities are tax deductible. Is it possible to deduct charitable contributions from your taxes without having to itemize Without itemizing your return, you can deduct up to $300 per person for cash contributions to qualified organizations. Without itemizing, married couples filing jointly can deduct up to $600. You'll need to itemize if you want to deduct more.