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The CK team gets many calls about crowdfunding and the taxability around the money raised. We recently shared a blog about the basics of crowdfunding, specifically for nonprofits, but wanted to elaborate a little more about the tax implications and tax consequences of crowdfunding.
Many crowdfunding platforms such as GoFundMe, Kickstarter and Indiegogo have fees ranging from 5% to 9%. Each platform specifies its own charges, limitations, and withdrawal processes. And in addition to those fees, funds raised may be taxable, depending on the purpose of the campaign. Here’s how each type of crowdfunding goal is taxed:
When an entity raises funds for its own benefit and the contributions are made out of detached generosity (and not because of any moral or legal duty or the incentive of anticipated economic benefit), the contributions are considered tax-free gifts to the recipient.
On the other hand, the contributor is subject to the gift tax rules if he or she contributes more than $15,000 to a particular fundraising effort that benefits one individual. In that case, the contributor is required to file a gift tax return. Unfortunately, regardless of the need, gifts to individuals are never tax deductible.
A “gift tax trap” occurs when an individual establishes a crowdfunding account to help someone else in need (the beneficiary) and takes possession of the funds before passing the money on to the beneficiary. Because the fundraiser takes possession of the funds, the contributions are treated as a tax-free gift to the fundraiser. However, when the fundraiser passes the money on to the beneficiary, the money then is treated as a gift from the fundraiser to the beneficiary; thus, if the amount is over $15,000, the fundraiser is required to file a gift tax return and reduce his or her lifetime gift and estate tax exemption. Some crowdfunding sites allow the fundraiser to designate a beneficiary so that the beneficiary has direct access to the funds which keeps the fundraiser from encountering any gift tax problems.
Gifts to specific individuals, regardless of the need, are not considered a charitable contribution under tax law (i.e. raising funds to help pay for someone’s funeral expenses). Another example, which includes a little tax twist, would be raising money to help someone pay for their medical expenses. Because it is a gift, it is not taxable to the recipient, but if the recipient itemizes their deductions, any amount of the gift the recipient spends to pay for their or a spouse’s or dependent’s medical expenses can be included as a medical expense on the recipient’s Schedule A.
Even if the funds are being raised for a qualified charity, the contributors cannot deduct the donations as charitable contributions without proper documentation. Taxpayers cannot deduct cash contributions, regardless of the amount, unless they can document the contributions in one of the following ways:
Thus, if the contributor is to claim a charitable deduction for the cash donation, some means of providing the contributor with a receipt must be provided.
When raising money for business projects, two issues must be contended with: 1) the taxability of the money raised and 2) the Security and Exchange Commission (SEC) regulations that come into play if the contributor is given an ownership interest in the venture.
Maybe. It depends on the aggregate number of backers contributing to the fundraising campaign and the total amount of funds processed through third-party transaction companies (i.e. credit card, PayPal, etc.). These third-party processors are required to issue a Form 1099-K reporting the gross amount of such transactions. There is a de minimis reporting threshold of $20,000 or 200 reportable transactions per year. It all depends on if the third party follows the de minimis rule.
If you have questions about crowdfunding-related tax issues, please contact Cray Kaiser today.