Crowdfunding is an ever-growing tool used to raise money for anything from funding a business to making charitable contributions and gifts. It can even be used to simply help avoid economic hardship. Kickstarter and Gofundme.com are two examples of fund-raising tools that allow organizers and donors to utilize crowdfunding. In specific instances, these distributions may not be included in the gross income of the recipient.
What is Crowdfunding?
Crowdfunding is a method of raising money through social media and the internet by soliciting contributions from a large target audience. In some cases, the beneficiaries of the funding initiate the crowdfunding campaign. For example, they may try to raise money to pay for much-needed dental surgery to college tuition. In the alternative, crowdfunding organizers try to raise money on behalf of others. Organizers solicit these contributions from donors to fund a variety of things, including business startups and music recording projects.
How Are Distributions of Money Raised Through Crowdfunding Reported?
A crowdfunding entity, whether a website or payment processor may be required to report distributions of money if the amount meets certain reporting thresholds. This is done by filing Form 1099-K, Payment Card and Third-Party Network Transactions, with the IRS. Of course, the website or payment processor must furnish a copy of the 1099-K to the party that received the distribution. Thus, if the distributions of raised funds are made to the crowdfunding organizer, the website or payment processor must furnish a copy of the Form 1099-K to the organizer.
When Must an Entity File a Form 1099-K?
The crowdfunding website or its payment processor is not required to file Form 1099-K or furnish it to the person receiving the distributions if the contributors to the crowdfunding campaign do not receive goods or services for their contributions. Only if distributions of money raised meet the reporting threshold, and the contributors to the crowdfunding campaign received goods or services for their contributions, is a Form 1099-K required to be filed.
Before 2022, the threshold to file and furnish a Form 1099-K was met if, during a calendar year, the total of all payments 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 met if, during a calendar year, the total of all payments exceeds $600 in gross payments, with no regard to the number of transactions or donations.
How is Money Raised Through Crowdfunding Treated for Income Tax Purposes?
Form 1099-K indicates the gross amount of the distributions made to a taxpayer during the calendar year. It is important to keep in mind that the issuance of a Form 1099-K does not mean that the reported amount on the form is taxable income.
Under the Internal Revenue Code, gross income is defined as including all income from any source unless federal law specifically excludes it from gross income. Generally, any property received as a gift is not included in the gross income of the recipient of the gift.
Any crowdfunding contributions that result from the contributors’ detached and disinterested generosity, and without the contributors receiving or expecting to receive anything in return, are considered gifts under federal tax law and not included in the gross income of those individuals for whom the crowdfunding campaign was organized.
Crowdfunding organizers who solicit contributions on behalf of other parties and distribute such contributions to these parties are not required to include the amounts of these contributions in their gross income.
When is a Contribution Considered Income?
If a contribution to crowdfunding campaigns is not a result of the detached and disinterested generosity of the contributor, it may not be considered a gift under the Tax Code. Also, any contribution to crowdfunding campaigns by an employer to, or for the benefit of, an employee is typically considered gross income on the employee’s tax return. It is important to consult an experienced tax professional in this situation to ensure that you properly treat for tax purposes any distribution that you received from a crowdfunding campaign.
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