Crowdfunding (November 2020)

Tax Tips

Crowdfunding

By Michael Aston, E.A.
Alhambra Tax Center

 

Crowdfunding is the process of soliciting financial contributions from a large number of people, referred to as backers, over the internet. The financial projects including business ventures, social causes, individuals with special need, and other projects. One of the most poplar crowdfunding website is Kickstarter, but there are many other sites, some may have specialized categories.

The crowdfunding projects can create a number of tax issues. In some cases, there is little guidance from the IRS or state on how to treat the transaction.

CONTRIBUTOR (BACKERS)

·       Tax Deduction – Generally, contributions to crowdfunded project will not be deductible unless the recipient is a qualified charitable organization. Contributions to an individual are not deductible.

·       Gift Tax Return – If the backer makes a contribution of more than $15k, a gift tax return may need to be filed.

·       Capital Gains/Losses – If the backer receives shares in the in a company, a capital gain/loss may occur when the shares are disposed of or in the even of a project failure.

·       Loans – If the backer receives interest from a loan to a project, then the interest needs to be reported as income.

CROWDFUNDER (RECEIVER)

·       Taxable Income – There are no specific Internal Revenue Code (IRC) section that defines the tax treatment of funds received through a crowdfunding campaign. This means that the receipt of money from a crowdfunding campaign is by default included in gross income, unless there is a specific exclusion listed in the code that states it is not considered gross income. Depending on the number of backers and amount raised, the receiver may get a 1099-K from the payment vendor.

·       Gifts – An exclusion from gross income that may apply to crowdfunding is the exclusion for gifts. The IRC and regulations provide examples of gifts but do not define the term “gift”. Courts have ruled that the following may be considered a gift.

o   Property given in a spirit of detached and disinterested generosity.

o   The excess value of property over the value of consideration received.

·       Sales Tax – A business providing a product to backers in return for a donation may owe sales tax depending on the state the receiver is located.

Crowdfunding is an exciting and successful method of raising funds. As a backer, chances are there is no tax deductions in most cases. As a receiver, there may be taxable income that needs to be reported. If you have any question on your individual situation (backer and receiver), contact your tax professional or go to irs.gov. The information for this article is from ©2020 Tax Material, Inc.

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