GoFundMe donations may have tax consequences
GoFundMe was launched in May 2010 in an effort to create a platform for individuals to fund their personal causes. Although there were several other crowdfunding platforms available at the time, the existing platforms focused mainly on funding for the creation of businesses or tangible products. Unlike its predecessors, GoFundMe focused on making financing available for personal needs, such as medical expenses and tuition. This focus on individual causes has contributed to GoFundMe becoming the largest crowdfunding platform on the internet. The ability to contribute directly to people in need, as opposed to their business products, has also caused confusion around the deductibility of such amounts as charitable contributions.
GoFundMe operates as an administrative platform, essentially acting as the middleman between individuals needing financial assistance and the donors who are willing to help. It enables individuals in need to establish their own campaigns to fundraise for their personal causes. They can create their own websites, upload photos and videos, and then share the website through email and various social media platforms. Other individuals may then use the platform to donate to the campaigns of their choice. GoFundMe is not a broker, financial institution or 501(c)(3) charitable organization. It merely facilitates the means for individuals to receive funds from unrelated donors.
On GoFundMe, you can raise money for an individual, a group of individuals or an organization. There are also two different types of campaigns available: a standard GoFundMe campaign or a “Certified Charity” campaign. With a standard GoFundMe campaign, most organizers are individuals, and they can withdraw the funds raised for their cause and deposit them in their own personal bank accounts however frequently they choose. Donations made towards standard GoFundMe campaigns are generally not eligible as a tax deduction as they are given to individuals and not registered charities.
Certified Charity campaigns raise money for a 501(c)(3) or other registered charity. Unlike with a standard GoFundMe campaign, the funds raised are not collected by the campaign organizers, but rather they are distributed directly to the certified charity through the use of PayPal Giving Fund. In order to create a certified charity campaign, the charity’s name or Employer Identification Number needs to be provided to GoFundMe. Only donations made towards a Certified Charity campaign are considered to be tax-deductible and will be issued tax receipts at year’s end by PayPal Giving Fund.
The IRS gets interested
Since its inception, GoFundMe has facilitated over 120 million donations, for a total of over $9 billion in funding. This amount of money being exchanged is bound to grab the attention of the Internal Revenue Service. Surprisingly, there has been very little guidance issued by Congress or the IRS in relation to crowdfunding.
This lack of guidance has caused quite a bit of disparity for both donors and donees when it comes to the tax reporting of GoFundMe transactions.
GoFundMe, being merely the administrative platform, will not report donations as income or issue any tax documents to donors or donees. Generally, the funds raised through GoFundMe are processed by a third-party organization, such as PayPal. Per IRS requirements, the third-party payment network must issue a Form 1099-K when the aggregate number of transactions exceeds 200 and the total value exceeds $20,000. Although reported on Form 1099-K, these amounts are generally considered personal gifts and would be excludable from a taxpayer’s gross income.
In order to determine proper tax treatment for both the contribution and the receipt of funds, one must look back to existing tax law. What is important to note for donees is that anything reported to the IRS on a 1099 will likely lead to a matching notice if not properly reported by the recipient. For example, a woman in Omaha received an approximately $19,000 tax bill from the IRS a year after she raised $50,000 on GoFundMe. The woman claimed that all funds she received were non-taxable gifts, and that she used the expenses for her medical treatments after a car crash. Even if this is true, she is now in a lengthy dispute with the IRS to prove it. Although donations received from GoFundMe campaigns are generally not taxable to the recipients, if the IRS issues a notice relating to those funds, the burden of proof then falls on the taxpayer. To get ahead of any issues with the IRS, recipients should report all GoFundMe proceeds as “Other Income,” and then separately show a reduction of that amount along with an explanation.
Crowdfunding contributions fall into a very gray tax area, and one of the only sources of IRS guidance is Private Letter Ruling 2016-0036. In this ruling, the IRS provides that a gift arises from "detached generosity” and contains no "quid pro quo.” It continues to state, however, that a voluntary transfer without a ”quid pro quo” is not necessarily a gift for federal tax purposes. Therefore, even this letter ruling does not offer much guidance for taxpayers and tax professionals. The conclusion to be drawn from this private letter ruling is that the tax treatment of any crowdfunding income and deductions can only be determined after careful evaluation of the specific facts and circumstances.
Although the majority of contributions made through GoFundMe are below the gift tax threshold, there are scenarios in which individuals are contributing significant amounts of money. In these cases, it is important to keep in mind the IRS reporting requirements for gifts. Donors who contribute more than the yearly gift exclusion amount to an individual ($15,000 for single taxpayers and $30,000 for married taxpayers filing jointly for the 2020 tax year) should ensure that they are filing the required gift tax return. There are exceptions to the gift tax requirement when amounts are paid for medical and educational expenses. However, the exception only applies when the money is contributed directly to the qualified medical or educational institution. Although education and medical expenses are two of the most common causes for GoFundMe donations, the money rarely goes directly to the qualified institution.
Recent changes in tax law have significantly reduced the amount of expenses that individual taxpayers are eligible to claim as deductions. Charitable contributions remain one of the few important deductions that can help significantly decrease federal liability. Therefore, it is essential to understand that not all money contributed to a personal cause, no matter how charitable it may seem, is deductible in the eyes of the IRS. With the continued rise of social media and the ability to connect with strangers virtually, the use of GoFundMe and other crowdfunding platforms is expected to increase.
As funding continues to grow, the IRS will likely pay more attention and increase reporting requirements for these transactions. Until further guidance is issued, it is important for taxpayers to maintain records of their crowdfunding contributions and receipts and consult with their tax professionals on the implications.