Crowdfunding has become an increasingly popular way for individuals and businesses to raise money online for a variety of purposes. Whether it’s to launch a business, cover medical expenses, or fund a creative project, many turn to platforms like GoFundMe, Kickstarter, and others to solicit contributions from the public. However, the tax implications of receiving money through crowdfunding can be complex, and it’s important to understand when and how these funds might need to be reported to the IRS.

Is Crowdfunding Income Taxable?

Whether or not money raised through crowdfunding is considered taxable income depends on the circumstances surrounding the campaign. Under federal tax law, all income is generally includible in gross income unless specifically excluded by law. This means that while some crowdfunding distributions may be non-taxable, others may need to be reported as income.

Key factors that influence the taxability of crowdfunding funds include:

• Gift Contributions: If contributions are made out of detached and disinterested generosity, and the donor does not expect anything in return, the amounts may be considered gifts. Gifts are typically not taxable to the recipient.
• Exchange for Goods or Services: If contributors receive or expect to receive something in return, such as a product or service, the funds are likely taxable. For example, if you raise money through a campaign that offers backers rewards, such as a product or special access, those contributions may be considered taxable income.
• Employer Contributions: If a crowdfunding campaign is set up for the benefit of an employee, and the employer contributes to the fund, those contributions are generally taxable to the employee as income.

Reporting Crowdfunding Distributions: Form 1099-K

Crowdfunding platforms or their payment processors may be required to issue Form 1099-K if the money distributed through the platform meets certain thresholds. This form reports payment card and third-party network transactions and is filed with the IRS and furnished to the recipient of the distributions.

For calendar years 2023 and prior, the reporting threshold required the total payments to exceed $20,000 and involve more than 200 transactions. However, for calendar year 2024, the IRS plans to reduce this threshold to $5,000, in alignment with the lower thresholds established by the American Rescue Plan Act (ARPA).

It’s important to note that if the payments distributed through crowdfunding are not made in exchange for goods or services, Form 1099-K may not be required.

Receiving a Form 1099-K for Crowdfunding

If you receive a Form 1099-K for funds raised through crowdfunding, it’s essential to carefully review the information on the form. Sometimes, the name listed on the form may not be familiar, as the payment processor may be listed as the filer instead of the crowdfunding platform. If you don’t recognize the filer, you can use the contact information provided on the form to clarify the payments reported.

Receiving a Form 1099-K does not automatically mean the funds are taxable. However, if non-taxable funds are reported on the form, it’s crucial to properly document this on your tax return to avoid confusion with the IRS.

For non-taxable crowdfunding distributions reported on Form 1099-K, the following steps can be taken when filing your tax return:

• Report Gross Proceeds: On Form 1040, Schedule 1, report the gross proceeds on Part I, Line 8z as “Form 1099-K Received for Non-Taxable Crowdfunding Distributions.”
• Make Adjustments: To reflect the non-taxable nature of the funds, list the same amount on Part II, Line 24z as “Form 1099-K Received for Non-Taxable Crowdfunding Distributions.”

This ensures that the net effect on your taxable income is zero.

Recordkeeping for Crowdfunding

If you are involved in crowdfunding, either as an organizer or a recipient, it’s critical to keep accurate records of the funds raised and how they were used. You should maintain records of:

• The total amount raised.
• The contributors and their contributions.
• How the funds were spent or distributed.

These records should be kept for at least three years in case of an IRS audit or review.

Need Help Navigating Crowdfunding and Taxes?

Crowdfunding can be a powerful tool, but it’s important to ensure you’re handling any tax obligations correctly. If you receive distributions from a crowdfunding campaign and are unsure how to report them, or if you’ve received a Form 1099-K and need assistance determining the taxability of the funds, consulting with a tax professional is a wise step. Proper guidance can help you stay compliant and avoid any potential issues with the IRS.

For more information on the tax treatment of crowdfunding, reach out to us today. We can help you understand your responsibilities and ensure that your tax filings are accurate and complete.