Crowdfunding complexities may produce tax surprises

Social media has fostered both the desire and the ability to raise funds for a number of worthy purposes. On their face, the tax consequences should be simple to analyze, but in practice many taxpayers are caught unaware.

Crowdfunding is the solicitation of money from a large number of people through the internet for charitable or entrepreneurial purposes. Crowdfunding has become increasingly popular during the past decade, sometimes resulting in taxable income surprises, according to tax attorney Barbara Weltman, author of “Small Business Taxation 2022.”

“In general, revenue from crowdfunding is includible in gross income, unless it meets certain exceptions,” she said. “Money received from crowdfunding without an offsetting liability — such as a repayment liability — is includible in gross income. The Internal Revenue Service made clear in a 2016 notice that the facts and circumstances of a particular situation must be considered to determine whether the money received in that situation is income. What that means is that crowdfunding revenues generally are includible in income if they are not loans that must be repaid, capital contributed to an entity in exchange for an equity interest in the entity, or gifts made out of detached generosity and without any quid pro quo. However, a voluntary transfer without a quid pro quo is not necessarily a gift for federal income tax purposes. In addition, crowdfunding revenues must generally be included in income to the extent they are received for services rendered or are gains from the sale of property.”

Crowdfunding websites or payment processors may be required to report distributions of money raised. They are required to file Form 1099-K, “Payment Card and Third-Party Network Transactions,” if the amount raised exceeds certain thresholds. Prior to 2022, the threshold for a crowdfunding website or payment processor to file and furnish a Form 1099-K was met if during the 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.    

But for calendar years beginning after 2021, the threshold is met if the total of all payments distributed to a person exceeds $600 in gross payments, regardless of the number of transactions or donations. 

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Thus, if a crowdfunding website or its payment processor makes distributions of money raised that meet the reporting threshold, and the contributors to the crowdfunding campaign received goods or services for their contributions, then a Form 1099-K is required to be filed, according to the IRS. In addition, if the distributions of the money raised are made to the crowdfunding organizer, a copy of the 1099-K must be furnished to the organizer. But if the distributions are made directly to individuals or businesses, the 1099-K must be provided to those individuals or businesses that received amounts that reached the reporting threshold.

The IRS has noted that a person receiving a 1099-K may not always recognize the filer’s name on the form: “Sometimes, the payment processor used by the crowdfunding website, rather than the crowdfunding website itself, will issue the Form 1099-K and be included as the filer on the form.” In this case, the service advises the recipient to use the phone number on the form to contact a person knowledgeable about the payments reported. 

And just because a person receives a 1099-K doesn’t automatically mean that the amount reported on the form is taxable to that person. If contributions are made as the result of “a detached and disinterested generosity,” and without the expectation of receiving anything in the return, the amounts may be gifts and not includible in income of the recipient.

Of course, donors are subject to the annual gift tax exemption limit. Moreover, only donations to qualified charitable organizations are tax deductible for donors, no matter how charitable the intent.

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