Asking others for a little financial help when you’re facing life’s more trying circumstances is nothing new, but the internet has put a whole new spin on the practice. Sites like GoFundMe, Kickstarter, GiveForward, and Crowdfunder make it possible to help others by simply tapping your phone. In fact, GoFundMe has reportedly had more than 50 million donors, who have raised more than $5 billion, since its inception.
Of course, the Internal Revenue Service (IRS) perks up whenever money changes hands, so it’s natural to ask: Do you have to pay taxes on this money when it starts pouring in? It all depends on whether the money is given to you out of the goodness of someone’s heart or because you provided something in exchange.
Here’s what you need to know about when and how taxes apply to crowdfunded donations.
- In most cases, if you raise more than $20,000 via more than 200 transactions during a year, the crowdfunding platform will file a 1099-K with the IRS to report the income.
- If the money you raise through crowdfunding is given without receiving something in return, it is considered a gift and is non-taxable.
- If donors receive rewards in return for their donations, those donations are considered taxable income.
- If you raise money for a business project, the costs of the project may offset some or all of the taxable income.
How Does the IRS Treat Crowdfunding?
The IRS didn’t really get around to addressing the issue of crowdfunding until 2016, when it issued Information Letter 2016-0036. The letter doesn’t specifically create new provisions for how to handle crowdfunded money, but it does point to some factors that could help people determine whether the donations fall under another section of the Internal Revenue Code (IRC). It comes down to an interpretation of those IRC rules.
The main takeaway of the letter is that donations are only taxable income if donors receive something in exchange for their donation, like a service or product. If not, they’re nontaxable gifts as long as you’re a private individual and not a business.
If the donations surpass an IRS threshold, then the crowdfunding website must report distributions made to the organizer of the crowdfunding campaign—who then turns the money over to the campaign’s beneficiary—on IRS Form 1099-K. Those thresholds are more than $20,000 and more than 200 transactions during a calendar year.
Some states have different thresholds for requiring a 1099-K. Massachusetts, Mississippi, and Vermont require 1099-Ks for each taxpayer who gets at least $600 in donations. The threshold for Missouri is $1,200.
Receiving a 1099-K doesn’t automatically mean the funds are reportable as income or that the money will be taxed. It still comes down to the nature of the fundraising campaign and whether the donor receives anything for the money they donated.
When Does the IRS Consider Crowdfunded Money a Gift ?
To better understand when crowdfunded donations are a tax-free gift, consider this example:
Suppose Joe and Mary lost their home and possessions after a catastrophic home fire. They have two young children and don’t know where to turn, because insurance won’t cover the full extent of their losses or medical expenses.
Mary’s family steps in and sets up a crowdfunding account to help the family, raising $30,000 from 201 people. This exceeds the 1099-K requirements. The crowdfunding platform sends them a copy of the 1099-K that it sent to the IRS.
Assuming that Joe, Mary, and the family didn’t give any of these 201 people anything in exchange for their money, the $30,000 can be considered a gift. It isn’t subject to taxes paid by the receivers of the gift.
The IRS had this to say about gifts in Information Letter 2002-0112 on April 15, 2002:
A gift proceeds from a “detached and disinterested generosity” and is made “out of affection, respect, admiration, charity, or like impulses.”
WePay, a third-party company that distributes the campaign proceeds received by crowdfunding sites, says that the IRS has clarified that it might not be necessary to file a Form 1099-K if the money given qualifies as a gift or donation.
The situation changes if Mary’s sister gives some good or service in exchange for donations. If so, then she—or maybe Mary and Joe—might be expected to report any profits from the donations (minus expenses related to the rewards) as income.
The IRS says:
If the payment proceeds primarily from “any moral or legal duty” or from “the incentive of anticipated benefit” of an economic nature, it is not a gift.”
If the money you raise from crowdfunding isn’t a gift, it's considered income. In that case, the IRS expects you to pay taxes on it.
Crowdfunding for Your Business
Starting or operating a business with crowdfunded money isn’t usually a true gift. As such, it could be taxable income, but it depends on the details of the income.
Suppose your new business is struggling to get off the ground. You resort to crowdfunding to raise money to keep it going until you begin to turn a profit. Maybe you offer donors the gadget you’ve invented as a gift in exchange for their money (reward-based crowdfunding). If you do, you will likely have to report the donation as business income, just like you would with any other sale.
Maybe you effectively issue stock in your company, and donors will receive a share in your enterprise in exchange for their money. This second incentive is often referred to as “equity crowdfunding.” Any profit that results from crowdsourced donations isn’t technically “income” when it’s raised from equity crowdfunding. It’s technically an investment—you gave donors equity in your business in exchange for the donated money. That’s not taxable income for your business.
If you use donated funds to pay yourself, you’ll have to claim it as income on your personal tax return.
Consider the intent of your crowdfunding. If the point is to generate funds for a project that would clearly be considered a trade or business outside of the crowdfunding context, then it will likely be considered taxable business income.
You may not have to pay taxes on that income in some situations, though. The funds that your business spends on a project might be considered deductible business expenses. If they reduce your taxable income by the same amount as the donations, then the donations are likely offset by your business expenses. You wouldn't end up paying federal income tax on the donations, even if they are technically taxable.
The Bottom Line
Crowdfunding sites or their third-party processors of funds will typically pay the individual who set up the account, not the ultimate beneficiary of the money. The crowdfunding organizer might end up receiving a Form 1099-K. It could be wise to consult a tax professional if that happens to you. You might be able to claim an “agency” relationship to eliminate responsibility for any taxes that might be assessed.
Beneficiaries (not organizers) of crowdfunding sources should be prepared to show what was or was not offered or exchanged for the funds received. This is generally provable with campaign records.
Frequently Asked Questions (FAQs)
Can you deduct a crowdfunding donation from your taxes?
Gifts to individuals through a crowdfunding platform are not tax deductible. Gifts to officially registered and certified charities are tax deductible, however, whether you donate directly or through a crowdfunding platform.
Can you deduct charitable donations from your taxes without itemizing?
You can deduct up to $300 per individual for cash contributions for qualifying charities without itemizing your return. Married couples filing jointly can deduct up to $600 without itemizing. If you want to deduct more, you will need to itemize.