Crowdfunding can be an effective method to raise money for business or personal ventures, projects, or other needs such as fundraising and charitable causes. The premise of crowdfunding is to raise cash from a large number of people (friends, family, coworkers, or other investors/backers), allowing more flexibility of contributors, greater influence, and more exposure to the cause. Nowadays, this is typically done online via social media or specific crowdfunding platforms.
We are often asked by our clients about the tax consequences of crowdfunding. Those receiving crowdfunding dollars want to know if they must include it in income. Those making payments to crowdfunding projects want to know if they can take a deduction for their contribution. Until recently, there has been very little guidance from the IRS about the tax consequences of crowdfunding transactions.
In recent published guidance, the IRS has reviewed certain aspects of crowdfunding and may characterize some contributions as taxable, while other contributions are non-taxable to the recipient. According to the IRS, crowdfunding revenues generally are includible in income unless they are:
- Loans that must be repaid to the payor;
- Capital contributed to an entity in exchange for an equity interest in the entity of a business; or
- Gifts made out of generosity and without any expectation of repayment or the receipt of other benefits.
Other considerations of crowdfunding income may also fall under additional tax codes, such as those for services rendered, gains from property sales, and the tax year in which the funds are regarded as in possession/receipt of.
Though not addressed in the IRS guidance, donors to crowdfunding projects can only take a tax deduction for their contribution if the donor is a 501(c)(3) charitable organization. The value of any goods or services received in exchange for their contribution must be subtracted from the donation. Contributions provided to a non-qualifying charitable organization will be treated within the context of individual gift tax returns and gifting limits.
Due to IRS income definitions and exclusions, it’s important that each crowdfunding situation be assessed individually before determining if the income is truly taxable or not. We highly recommend you consult a tax professional prior to establishing a crowdfunding ask.
Gregory Ward is a certified public accountant and joined Dalby, Wendland & Co.’s Glenwood Springs office in August of 2013. He attended the University of Illinois and attained a bachelor’s degree in accountancy, with highest honors. Greg works in the areas of individual and small business federal and multi-state taxation. He is a member of the American Institute of CPAs, Colorado Society of CPAs, National Eagle Scout Association, American Mensa, and volunteers his time as the treasurer for the Colorado Society of CPAs Roaring Fork Chapter.
