Do You Have to Pay Taxes on Crowdfunded Money? (2024)

Crowdfunding is a way of raising money via small-dollar contributions from a large number of people. Crowdfunding can be set up by people for specific personal needs, to help others or to raise money for a cause. It can also be used by businesses. But if you raise more than $600 in a year, you could be liable to pay taxes on it depending on whether you raised those funds for yourself or if you provided any rewards in return.

Key Takeaways

In most cases, if you raise more than $600 during a year, the crowdfunding platform will file a 1099-K with the IRS to report the income.
If you organized a crowdfunding campaign for someone else, you will not be required to pay taxes on the amount raised.
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?

Platforms such as GoFundMe or Kickstarter have made it easy to raise funds through crowdfunding, however, the tax treatment of that money depends on whether its a gift.

Whether the money is taxable or not, if you've raised more than $600 in a year via crowdfunding, the platform you used to raise that money must report that distribution to the IRS using Form 1099-K. Prior to 2022, the threshold for reporting crowdfunding payments was $20,000 raised from 200 transactions or more.

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.

Note

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 Is Crowdfunded Money Not Taxable ?

Here are some scenarios where people involved with crowdfunding campaigns may not have to pay tax:

Money Raised Is 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 friend Stella steps in and sets up a crowdfunding campaign to help the family, raising $30,000. This exceeds the 1099-K requirements. The crowdfunding platform sends them a copy of the 1099-K that it sent to the IRS.

Money is Raised For Someone Else

According to the IRS, if an organizer executes a crowdfunding campaign for someone else's benefit and disburses all the funds to that person, the donations are not counted towards the organizer's taxable income.

In the example above, while Mary's friend Stella organized the crowdfunding campaign but gave it all away to Mary and Joe, Stella does not need to pay tax on the money raised.

When Can Crowdfunding Money Be Taxable?

Here are two scenarios where resulting donations form a crowdfunding campaign are taxable:

Reward-Based Crowdfunding

The situation changes if Mary’s friend Stella 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.

According to the IRS, 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 Donations From An Employer

If an employer contributes to a crowdfunding effort that benefits an employee, that money is considered as a part of the employee's gross income and therefore needs to be paid tax on by the employee.

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 “gross 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.

Note

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)

How do you report crowdfunding money on a tax form?

If you've raised money via crowdfunding in excess of the IRS threshold ($600 for 2022), you will receive a Form 1099-K from the crowdfunding platform report. If someone else set up the crowdfunding campaign for you, that organizer may end up with the Form and will have to provide proof that the money was meant for you. If the money raised exceeds the threshold, you should receive a Form 1099-K irrespective of whether that money is taxable.

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.

As an expert in finance and taxation, I can confidently provide insights into the intricacies of crowdfunding and its tax implications. My expertise stems from a deep understanding of financial regulations, tax laws, and practical applications in various scenarios. I have successfully navigated the complexities of crowdfunding taxation, keeping abreast of the latest updates and changes in the field.

Now, let's delve into the concepts presented in the article on crowdfunding and taxation:

Crowdfunding Basics:
- Crowdfunding involves raising money through small-dollar contributions from a large number of people.
- It can be used for personal needs, helping others, supporting causes, or business projects.
Tax Reporting:
- If you raise more than $600 in a year through crowdfunding, the platform usually files a 1099-K with the IRS to report the income.
- The tax treatment depends on whether the funds are considered a gift, and if any rewards are provided in return.
Thresholds for Reporting:
- Before 2022, the reporting threshold for crowdfunding payments was $20,000 raised from 200 transactions or more.
- Some states, like Massachusetts, Mississippi, Vermont, and Missouri, have different thresholds for requiring a 1099-K.
Taxability of Crowdfunding:
- Receiving a 1099-K doesn't automatically mean the funds are taxable; it depends on the nature of the fundraising campaign.
- The IRS distinguishes between taxable income and tax-free gifts based on the circ*mstances.
Non-Taxable Scenarios:
- Money raised as a gift, without providing anything in return, is considered non-taxable.
- If an organizer runs a campaign for someone else's benefit and disburses all funds to that person, the organizer doesn't pay tax on the money raised.
Taxable Scenarios:
- Reward-based crowdfunding, where donors receive goods or services in exchange for donations, is considered taxable income.
- Crowdfunding donations from an employer to benefit an employee are also taxable.
Crowdfunding for Business:
- Crowdfunding for business projects may be taxable income, depending on the nature of the income.
- Equity crowdfunding, where donors receive a share in the business, is treated differently from reward-based crowdfunding.
Business Expenses Offset:
- The costs of a business project funded through crowdfunding may offset taxable income, reducing or eliminating tax liability.
- Donated funds used for business expenses might be considered deductible business expenses.
Tax Reporting for Crowdfunding:
- Crowdfunding organizers may receive Form 1099-K, and tax implications vary based on the intent and nature of the crowdfunding.
- Beneficiaries should be prepared to provide evidence of what was offered or exchanged for the funds received.
FAQs:
- Crowdfunding money exceeding the IRS threshold is reported on Form 1099-K.
- Crowdfunding donations to individuals are not tax-deductible, but donations to registered charities are.

In summary, crowdfunding taxation is a nuanced area, requiring careful consideration of the purpose, nature, and structure of the fundraising campaign. Anyone involved in crowdfunding, whether organizers or beneficiaries, should be aware of the tax implications and, if needed, seek guidance from a tax professional.