Tax Implications of Crowdfunding
Crowdfunding is a method used to raise money through websites by soliciting contributions from numerous people. Contributions may be solicited to fund businesses or projects, for charitable donations or for private gifts. The contributions are solicited by the people establishing the crowdfunding campaigns or by crowdfunding organizers.
However, many people do not know that the funds raised are subject to taxes. The crowdfunding website or its payment processor may be required to report to the IRS distributions of money raised if the amount distributed meets certain reporting thresholds.
These third-party settlement organizations report distributions on Form 1099-K. Once the form is completed, they will send a copy of the form to the person who’s receiving the distributions if the payments are in exchange for goods or services. The American Rescue Plan Act clarified this requirement:
- In calendar years 2023 and prior, the form was sent if the total of all payments distributed exceeded $20,000 and resulted from more than 200 transactions.
- In calendar year 2024, the IRS reduced the threshold to $600 with no transaction minimum.
Receiving a 1099-K
If you receive a Form 1099-K from a payment processor but don’t recognize the name, contact the processor using the phone number provided on the form. They can clarify the source and nature of the reported payments, ensuring accuracy in your tax reporting.
While Form 1099-K reports gross payments received by you through the crowdfunding site, these amounts aren’t necessarily fully taxable. You can exclude nontaxable amounts on your personal taxes by using Form 1040, Schedule 1. On line 8z, list the gross amount from the 1099-K. Then use line 24z to deduct the nontaxable portion.
When the IRS sees that nontaxable amounts on Form 1099-K were not reported on your tax return, as often happens for crowdfunding distributions, they will contact you for more information. At that time, you can clarify why specific payments were excluded. For example, gifts or reimbursements typically aren’t taxable, while amounts received in exchange for goods or services are. Be sure to keep impeccable paperwork to support your claim.
Why are these funds taxable?
Under federal tax law, gross income includes all income; the source does not matter. In most cases, property or funds received as a gift aren’t included as gross income. So if you didn’t expect to receive the funds generated by crowdfunding, and if you did not give goods or services in return, the monies may be gifts and excludable from gross income.
However, not all crowdfunding is detached and disinterested generosity. Many funds involve payments for goods or services (including preorders or exclusive perks), which makes them taxable income. Similarly, the funds are taxable if any type of financial gain is involved. Any of these examples would be considered taxable:
- Funds raised to support a business, such as to cover operating expenses, expand services or fund specific projects
- Money raised for an individual’s services or expertise — such as a writer or artist offering personalized content in return for donations
- An employer contributing for the benefit of an employee
If a crowdfunding organizer solicits contributions on behalf of others, the money raised would not be included in the organizer’s gross income if the organizer further distributed the money to a recipient.
More information is available at Understanding Your Form 1099-K. As with any complicated tax matter, you may want to consult with a tax professional. It is a good idea to keep complete and accurate records for at least three years of all facts and circumstances surrounding the fundraising and disposition of funds.
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