Cash and Kickstarter: the Tax Implications of Crowd Funding

Cash and Kickstarter: the Tax Implications of Crowd Funding

by Greg Lindberg, May 2019

Whether you're looking for funding or wanting to support an important cause or venture, crowdfunding will likely be factored into the equation. While crowdfunding has exploded onto the scene in recent years as a fantastic means to raise money, there are several tax implications at play both for those seeking funding and for donors.

Tax Implications of Operating a Crowdfunding Campaign

If you start a crowdfunding campaign through which you receive funding for a business venture or personal cause, there's a chance you may receive hundreds to hundreds of thousands of dollars with this strategy. While most crowdfunding sites take a percentage of the money for your use of their platform, you still could walk away with a decent sum.

So, the $64,000 question is whether or not this money you receive is considered taxable income. In general, the IRS has not made any formal rulings on crowdfunding and taxes. However, each case must be looked at individually to make a reasonable determination.

Income generated via crowdfunding should be reported on an income tax return and therefore is considered taxable income if it is not:

  • a loan that has to be paid back,
  • capital that is contributed for an equity stake within a business, OR
  • a gift given out of “detached and disinterested generosity" without the expectation of reciprocation in the future.

Also, it's worth noting that crowdfunding revenue must be reported as income if it is received for services rendered or is part of a gain from selling property. Funding seekers can generally offset at least a portion of the income they generate through crowdfunding by claiming relevant expenses as a deduction within a particular tax year.

For example, you raise $5,000 through crowdfunding for a biotech startup, and you also spend $5,000 on business-related expenses in the same year. Your expenditures may fully offset the money you brought in through crowdfunding. If you received funding in one year and then spend money on your startup in a later year, the accrual method may allow you to offset a portion of your income.

When claiming money, campaign creators who exceed certain IRS thresholds—$20,000 in gross payments per year and 200 or more transactions—should receive a copy of Form 1099-K from either the crowdfunding site they use or a third-party payment processing company.

Tax Implications of Contributing to a Crowdfunding Campaign

If you're wondering whether you can deduct any contributions you make to a crowdfunding campaign, the answer is “maybe."

According to the IRS tax code, donations can only be deducted if they are made to qualified organizations (and provided that you itemize your deductions on Schedule A). Such organizations typically include charities with 501(c)(3) tax-exempt status. Plus, all donations must be documented properly to claim them as a write-off.

For instance, if a nonprofit organization sets up a page on Kickstarter to raise money for books for underprivileged children, the money you contribute would be deductible on your return. Keep in mind that donations made to individuals are not tax-deductible. So, if someone is raising money to cover personal medical bills for cancer treatments, such contributions to this individual's Kickstarter fund would not be deductible on your return.

In addition, a sales tax may apply to a crowdfunding contribution if the person raising the money has a connection to the local area of the contributor.

Tying It All Together

Because there is currently so much gray area when it comes to crowdfunding and taxes, it's imperative for both campaign creators and contributors to maintain solid records and consult with an accounting professional to ensure all tax requirements are met.