Are Crowdfunding Contributions Taxable or Tax Deductible?
With crowdfunding continuing to grow in popularity as a means to do everything from launch business ventures to help those in need, the Internal Revenue Service (IRS) has recently provided guidance on crowdfunding’s tax implications. However, as is often the case, the IRS’ guidance leaves several key questions unanswered.
This may be due, in part, to the fact that the tax issues surrounding crowdfunding contributions and disbursements are not straightforward. Sometimes crowdfunding contributions are taxable, and sometimes they aren’t. In this article, tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, provides an introduction to what both recipients and contributors need to know:
Sometimes Crowdfunding Receipts are Taxable, and Sometimes They Aren’t
Whether funds received from a crowdfunding campaign are taxable depends in large part on the reason why the funds were raised. Broadly speaking, most crowdfunding campaigns fall into one of two categories:
- Campaigns designed to raise funds for business ventures (i.e., the launch of a new product or service); or,
- Campaigns designed to provide financial help to individuals in need (i.e., accident victims who need help with their medical bills or children who have lost their parents).
Under the Internal Revenue Code, funds obtained through campaigns in the first category are taxable. Even though contributions may be styled as “donations,” and even though contributors may receive “free” gifts for their participation, the IRS views this type of crowdfunding campaign as a standard business transaction. The business is receiving income for its goods or services, and this income is taxable just like any other form of business revenue.
However, campaigns that fall into the second category generally do not trigger federal income tax liability. Instead, the IRS treats contributions to these campaigns as gifts in most cases. The key here is that contributors must not have an expectation of receiving anything in return. If an organizer offers any sort of reward, this can alter the analysis. Likewise, as the IRS notes, “[w]hen employers give to crowdfunding campaigns for an employee, those contributions are generally included in the employee's gross income.”
Crowdfunding Contributions are Not Tax Deductible
Even though individuals who contribute to crowdfunding campaigns may feel as though they are making donations, their contributions are not “donations” for federal income tax purposes. This means that crowdfunding contributions generally are not tax deductible. To qualify as a deductible charitable donation, a donation must be made to a qualifying charitable organization for the benefit of the general public, and not for the benefit of a specific individual or for the benefit of the organization itself.
Given these considerations crowdfunding organizers, contributors and recipients must be careful to avoid problems with the IRS. Improper reporting of crowdfunding contributions or receipts could trigger an IRS audit, which could in turn trigger liability for back taxes, interest and penalties.
Have Questions about a Crowdfunding Tax Issue? Contact Tax Lawyer Kevin E. Thorn in Washington D.C.
Do you have questions about a crowdfunding tax issue? Or, are you dealing with crowdfunding-related issues with the IRS? If so, we can help. To arrange a confidential initial consultation with tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 202-349-4033, email firstname.lastname@example.org or contact us confidentially online today.