IRS may contact the recipients of crowdfunding campaign proceeds if not reported. IRS issues a soft alert to Taxpayers regarding their tax obligations for monies received under crowdfunding activities as well as the benefits of recordkeeping.
What is Crowdfunding?
It is the activity of raising or soliciting money (contributions) from a large number of people via “websites”, mainly social media. Basically, raising money online through “third-party backers” – the investors or contributors. The investors/contributors are able to invest/contribute for as little as $10 at times and select from a multitude of projects that can fund a business, a charitable venture, or a gift. Most crowdfunding is used for “startup” businesses in order to bring a product or a service to the market or for personal emergencies such as an illness or a natural disaster. The largest and most recognized crowdfunding platform is GoFundMe.
How is the money raised?
- By organizers on behalf of other people or businesses.
- By people establishing campaigns to raise money for themselves or their businesses.
Are you in receipt of a Form 1099-K for Distributions of Money Raised Through Crowdfunding?
IRS states that “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 Form 1099-K is required to be filed 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.
Under the “American Rescue Plan Act”, crowdfunding websites or payment processors are not required to file Form 1099-K with the IRS or furnish it to the person to whom the distributions are made if the contributors to the crowdfunding campaign do not receive goods or services in exchange for their contributions.
Reporting Thresholds change in 2022
Prior to 2022, the threshold for a crowdfunding website or payment processor to file and furnish a Form 1099-K was met if, during a calendar year, the total of all payments distributed to a person exceeded $20,000 in gross payments resulting from more than 200 transactions or donations.
For calendar years beginning after December 31, 2021, the threshold is lowered and is met if, during a calendar year, the total of all payments distributed to a person exceeds $600 in gross payments, regardless of the number of transactions or donations.
A Form 1099-K is required to be filed with the IRS if the crowdfunding website or the payment processor make distributions of raised money that meet the reporting threshold ($600 for 2022), AND the contributors to the campaign received goods or services for their contributions.
A copy of the Form 1099-K must be furnished to the crowdfunding organizer if distributions of the money raised are made directly to individuals or businesses for whom the organizer solicited funds and the contributors to the campaign received goods or services for their contributions.
Tax Treatment of Money Raised Through Crowdfunding
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.
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.
Recordkeeping for Money Raised Through Crowdfunding is important
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. ©