Are Crowdfunding Monies Taxable?

On August 2024, the IRS, for the third time in two years, reminded taxpayers that crowdfunding monies may be taxable.  Due to the popularity of crowdfunding monies raised online, the IRS issued News regarding how money raised through crowdfunding may be taxable via its First Notice as a Fact Sheet on March 2022 (FS-2022-20) and a second notice on August 8, 2022 as a Tax Tip.  All IRS notices address the taxable component of crowdfunding monies, and focus on the concept that hat “some money raised through crowdfunding may be considered a gift”.  The notices states that “Under federal tax law, gross income includes all income from any source, unless it’s excluded from gross income by law. In most cases, gifts aren’t included in the gross income of the person receiving the gift.”  That said, the IRS is encouraging taxpayers to consult with a tax professional in order to understand the taxpayer’s responsibility in the treatment of amounts received from crowdfunding campaigns.

Here are some extracts of what the IRS wants you to keep in mind about crowdfunding monies as per the FACT Sheet issued on August 2024:

• Crowdfunding distributions may be includible in the gross income of the person receiving them depending on the facts and circumstances.
• The crowdfunding website or its payment processor may be required to report distributions of money raised if the amount distributed meets certain reporting thresholds.
• Crowdfunding is a method of raising money through websites by soliciting contributions from a large number of people.
• The contributions may be solicited to fund businesses, for charitable donations or for gifts. In some cases, the money raised through crowdfunding is solicited by crowdfunding organizers on behalf of other people or businesses. In other cases, people establish crowdfunding campaigns to raise money for themselves or their businesses.

Keep an eye out for Form 1099-K for distributions of crowdfunding monies

• The crowdfunding website or its payment processor may be required to report distributions of money raised, if the amount distributed meets certain reporting thresholds, by filing Form 1099-K, Payment Card, and Third Party Network Transactions, with the IRS.
• If required to file a Form 1099-K with the IRS, the crowdfunding website or its payment processor must also furnish a copy of that form to the person to whom the distributions are made.
• The crowdfunding website or its payment processor is not required to file Form 1099-K with the IRS or furnish it to the person to whom the distributions are made if the payments are not made in exchange for goods or services.
• Receiving a Form 1099-K doesn’t automatically mean the amount shown is taxable. However, if the taxpayer doesn’t include the distributions from the form on their tax return, the IRS may contact the recipient for more information.
• The recipient may need to explain why the crowdfunding distributions weren’t reported.

 Reporting thresholds for a crowdfunding website or payment processor to file and furnish Form 1099-K for crowdfunding monies are:

• Calendar years 2023 and prior – Form 1099-K is required if the total of all payments distributed to a person exceeded $20,000 and resulted from more than 200 transactions.
• Calendar year 2024 – The IRS announced a plan for the threshold to be reduced to $5,000 as a phase-in for the lower threshold.

How about the tax treatment of crowdfunding monies? Extracts from the FACT Sheet issued August 2024 indicate that:

• Under federal tax law, gross income includes all income from whatever source derived unless it is specifically excluded from gross income by law. Whether crowdfunding distributions are includible in the gross income of the person receiving them depends on all the facts and circumstances of the distribution.
• In most cases, property received as a gift is not includible in the gross income of the person receiving the gift.
• If crowdfunding contributions are made as a result of the contributors’ detached and disinterested generosity, and without the contributors receiving or expecting to receive anything in return, the amounts may be gifts and therefore may not be includible in the gross income of those for whom the campaign was organized.
• Contributions to crowdfunding campaigns are not necessarily a result of detached and disinterested generosity, and therefore may not be gifts.
• Contributions to crowdfunding campaigns by an employer to, or for the benefit of, an employee are generally includible in the employee’s gross income.
• If a crowdfunding organizer solicits contributions on behalf of others, distributions of the money raised to the organizer may not be includible in the organizer’s gross income if the organizer further distributes the money raised to those for whom the crowdfunding campaign was organized.

Recordkeeping for crowdfunding monies

People who run campaigns or receive money from one should keep careful records about the campaign and the disposition of funds for at least three years. Complete and accurate records of fundraising proceeds and dispositions are critical for recipients of campaigns for at least three years.

Income Tax consequences depend on all the facts and circumstances

The IRS stated that “If the distributions reported on a Form 1099-K are not reported on the tax return of the recipient of the form, the IRS may contact the recipient for more information”. Taxpayers that receive monies from crowdfunding campaigns ought to consult a Tax Expert. ©