When Is Crowdfunding Money Tax Applicable?
Seeking financial help has been happening traditionally. How about online help? Many online sources are available to help make it happen. Major crowdfunding platforms such as Kickstarter, Crowdfunder, and GoFundMe allow you to help others from your doorstep.
The GoFundMe platform reports generating $5 billion from its inception, and several donors account for 50 million donors. Here is when the Internal Revenue Service (IRS) comes into action, especially when a considerable amount of money exchange happens.
Here comes the question of whether tax requires paying for the crowdfunded money. This depends on whether you have accepted donations from someone’s goodwill or given something in exchange for the received amount.
Here you will know the instances when taxes apply to the crowdfunding amount.
1. Generally, in cases you raise exceeding $20,000 through over 200 transactions in a year, the crowdfunding platform will file a 1099-K with the IRS for income reporting
2. Money raised through crowdfunding is without any expectations. The amount is non-taxable.
3. The crowdfunding amount is only taxable if the donor gives the amount expecting something in return
4. For instance, if you have raised for a business project, the project costs may cancel some or total taxable income.
IRS measures for treating crowdfunding
Until 2016, IRS was not around the taxes of the crowdfunded amount. However, in 2016, a letter was issued which does not precisely state the solutions to manage the crowdfunded amount. However, it defines certain factors that assist people in knowing whether the amount comes under the Internal Revenue Code (IRC).
The letter mainly talks about how the donations are taxable if the donors have something return, such as a product or a service. If not, the amount is non-taxable as you are not a business but a private individual.
If the donations exceed the IRS threshold, the specific crowdfunding website must report the distributions to the crowdfunding campaign organizer, who transfers the money to the campaign’s beneficiary on IRS Form 1099-K. The threshold amount is $20,000, and the transactions exceed 200 a year.
Finally, what is considered is the donation intent. Receiving a 1099-K does not mean the obtained money will be tax liable. It depends on whether the donor receives anything for the amount donated.
Cases when IRS regards crowdfunding amount as a gift
To better understand this concept, let us look at a simple example. Consider a family you have lost their home due to a fire hazard, is left alone with their children, and has no one to turn to.
In this instance, they sought to crowdfund, which helped raise the amount that surpassed the 1099-K requirements. Consequently, the crowdfunding websites send them a 1099-K copy, which is sent to the IRS.
A gift is an amount donated out of charity, admiration, respect, and affection. With the view that the family did not give the donors anything in return for the amount received, the IRS regards it as a gift. Hence it is not subject to tax. Here is how IRS stated the gift in the information letter 2002-0112 on April 15, 2002.
The situation differs in the case of reward-based crowdfunding. Let us see how:
In the above case, if the family gives some service or goods in exchange for donations, the family is expected to report the profits from the donations as income. In such a case, money is not regarded as a gift but as income. Thereby, the IRS expects you to pay the taxes.
Initiating a business with the crowdfunding amount will not be regarded as a gift. So, it can be a taxable income. However, it depends on the income details. Consider your business is unable to make up to the expectations and experiencing losses, and you chose the crowdfunding option to support your business financially.
In return for the donation, you give any of your products or services to the donors. If so, you report your donations as business income like any other sale.
Another alternative is to seek investment for various donors and give a share in your business. Such income is not taxable.
Usually, a crowdfunding organizer might receive Form 1099-K. Here is when you could need the help of a tax professional to know the taxable income. Also, crowdfunding campaign beneficiaries should have campaign records to show what was offered or exchanged for the funds received.