Crowdfunding – Important Tax Guidelines

If you have been using a crowdfunding platform, such as GoFundMe, Kickstarter, or Patreon, to solicit contributions or for charitable donations or gifts, you may be required to report distributions of the money raised. Tax guidelines for contributions and distributions from online crowdfunding can vary based on the nature of the funds raised, the platform used, and how the money is utilized. Following is a breakdown of some general rules for crowdfunding contributions and distributions according to the IRS.

1. Contributors/donors

When contributing to a crowdfunding campaign, whether or not you can claim a deduction depends on the type of campaign.

• Charitable contributions
  • If you donate to a campaign for a qualified charitable organization, typically 501(c)(3) nonprofits, you may be able to claim the donation as a tax-deductible charitable contribution.
  • However, if you receive something in return for your donation like a product or service, the deductible amount may be reduced by the value of the benefit received.
• Personal or non-charitable campaigns
  • Donations to personal causes like helping a friend in need or supporting an individual's medical expenses, or non-charitable campaigns are not tax-deductible.

2. Fundraisers (campaign organizers or beneficiaries)

The tax treatment of funds received through crowdfunding depends on several factors, including the purpose of the campaign and the intent behind the funds.

• Personal gifts
  • If you're raising money for personal reasons, e.g., medical expenses, disaster relief, personal hardship, and the funds are seen as gifts, they are generally not considered taxable income.
  • Under the IRS's gift tax rules, a gift from an individual donor that does not exceed the annual gift exclusion amount is not taxable to either the giver or the recipient. However, gifts above this threshold may require the donor to file a gift tax return, though the recipient still wouldn’t owe taxes.
• Business or project-related crowdfunding
  • If you are raising money for a business venture or a project, such as producing a product or starting a business, the funds are likely considered taxable income.
  • Crowdfunding income can be categorized as business income, which means that the money raised must be reported on your tax return and is subject to regular income tax and potentially self-employment taxes, if applicable.
  • If you give contributors something in return, e.g., a product, service, or other rewards, these contributions are more likely to be considered sales and may also be subject to sales tax.

3. Platforms

Crowdfunding platforms send out tax documents if the total amount raised meets certain thresholds. In 2024, platforms are required to report distributions to campaign organizers if the gross amount exceeds $5,000.

Conclusion

Both donors and recipients should keep thorough records of the transactions, including campaign details, receipts, and communications. This is especially important if the campaign organizer needs to defend the tax treatment of the funds raised.

Tax laws can be complex. Consult with your R&A advisor if you are involved in a crowdfunding campaign to ensure you're complying with all relevant tax obligations.