Crowdfunding Complexities May Produce Tax Surprises

Crowdfunding is the solicitation of money from a large number of people through the internet for charitable or entrepreneurial purposes. Crowdfunding has become increasingly popular during the past decade, sometimes resulting in taxable income surprises.

In general, revenue from crowdfunding is includible in gross income, unless it meets certain exceptions.   Money received from crowdfunding without an offsetting liability — such as a repayment liability — is includible in gross income. The Internal Revenue Service made clear in a 2016 notice that the facts and circumstances of a particular situation must be considered to determine whether the money received in that situation is income.

What that means is that crowdfunding revenues generally are includible in income if they are not loans that must be repaid, capital contributed to an entity in exchange for an equity interest in the entity, or gifts made out of detached generosity and without any quid pro quo. However, a voluntary transfer without a quid pro quo is not necessarily a gift for federal income tax purposes. In addition, crowdfunding revenues must generally be included in income to the extent they are received for services rendered or are gains from the sale of property.

Crowdfunding websites or payment processors may be required to report distributions of money raised. They are required to file Form 1099-K, “Payment Card and Third-Party Network Transactions,” if the amount raised exceeds certain thresholds. Prior to 2022, the threshold for a crowdfunding website or payment processor to file and furnish a Form 1099-K was met if during the calendar year, the total of all payments distributed to a person exceeded $20,000 in gross payments resulting from more than 200 transactions or donations.

But for calendar years beginning after 2021, the threshold is met if the total of all payments distributed to a person exceeds $600 in gross payments, regardless of the number of transactions or donations.

Of course, donors are subject to the annual gift tax exemption limit. Moreover, only donations to qualified charitable organizations are tax deductible for donors, no matter how charitable the intent.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.