Crowdfunding has become a popular way to raise funds for everything from new business ventures to charitable causes. Platforms like Kickstarter and GoFundMe make it easy to reach a wide audience and gather financial support, but if you’re organizing a crowdfunding campaign, it’s essential to understand the tax obligations that come with those contributions. In some cases, money raised through these platforms may be subject to income tax, requiring careful record keeping and reporting.
When Crowdfunding Earnings Are Considered Taxable
The IRS generally considers crowdfunding money taxable income if it’s received in exchange for goods or services, like when a campaign offers rewards for donations. For instance, a Kickstarter project might send backers a product sample in exchange for contributions. These kinds of transactions are treated as business income, and you must report them on your tax return.
On the other hand, contributions made as genuine gifts, where donors give out of “disinterested generosity” and receive nothing in return, are not considered taxable income. However, proving that contributions are gifts can be complex, so it’s always wise to consult with a tax professional if you’re uncertain about how to classify the funds you’ve raised.
The Role of Form 1099-K in Crowdfunding Campaigns
To ensure compliance, many crowdfunding platforms are required to report transactions through Form 1099-K, Payment Card, and Third-Party Network Transactions. This form is used to report income if the amount distributed to a campaign organizer meets or exceeds $600 in a calendar year. If you exceed this threshold, the platform or its payment processor is required to file Form 1099-K with the IRS and send you a copy as well.
However, purely charitable contributions, meaning no goods or services were exchanged, do not require Form 1099-K. For campaigns that straddle this line, such as those offering perks or rewards to donors, the platform will likely issue a Form 1099-K if the threshold is reached, regardless of the number of transactions. Even if a 1099-K isn’t issued, you’re still responsible for reporting any taxable income on your return.
Why Record Keeping Matters for Crowdfunding
Accurate record keeping is essential when it comes to crowdfunding. Keep detailed records of all contributions, including the dates and amounts, as well as any items or services you provided in exchange. This documentation will help you differentiate between income and non-taxable contributions, should the IRS request clarification.
When your crowdfunding campaign provides rewards, it’s best to treat the amount raised as business income. Retaining all receipts, invoices, and related documentation can support your tax filing and demonstrate that any deductions claimed for business expenses are valid.
How a CPA Can Help You Navigate Crowdfunding Taxes
Crowdfunding can be a powerful tool for raising funds, but it’s crucial to understand the tax rules that apply to your specific campaign. Consulting with a CPA helps ensure that you’re meeting all IRS requirements and can assist in maximizing potential deductions if your campaign qualifies as a business expense. We are here to guide you through the complexities of crowdfunding tax obligations so you can focus on achieving your fundraising goals.
Need help sorting out your crowdfunding earnings? Contact Myrick CPA to schedule a consultation, discuss tax planning, and ensure you understand the tax implications of crowdfunding.
