October 2022 Foodman Website and JD Supra
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Due to the popularity of crowdfunding as a venue to raise money online, for the second time in 2022, the IRS has issued News regarding how money raised through crowdfunding may be taxable.  The first notice was issued by the IRS as a Fact Sheet on March 2022 (FS-2022-20) and the second notice was issued on August 8, 2022 as a Tax Tip. Although both notices address the taxable component of crowdfunding, the tax tip issued on August 8, 2022, focuses on the concept that “some money raised through crowdfunding may be considered a gift”.  The notice 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 is what the IRS wants taxpayers involved in crowdfunding to know:

  • If a crowdfunding organizer is raising money on behalf of others, the money may not be included in the organizer’s gross income, as long as the organizer gives the money to the person for whom they organized the crowdfunding campaign.
  • If people donate to a crowdfunding campaign out of generosity and without expecting anything in return, the donations are gifts. Therefore, they will not be included in the gross income of the person for whom the campaign was organized.
  • However, not all contributions to campaigns are gifts and may be taxable.
  • When employers give to campaigns for an employee, those contributions are generally included in the employee’s gross income.

Taxpayers may receive Form 1099-K for money raised

The crowdfunding website or its payment processor must file Form 1099-K, Payment Card, and Third-Party Network Transactions with the IRS if:

  • The amount raised is more than $600
  • Contributors to the crowdfunding campaign receive goods or services for their contributions

If a Form 1099-K is filed, the organizer or the beneficiary of the fundraiser will receive a copy, depending on who received the funding directly from the crowdfunding website

  • 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.

Recordkeeping for money raised through crowdfunding

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.  ©