Is crowdfunded money taxable?
There’s no easy answer to that, it’s complicated. Kickstarter or GoFundMe (or any of the others) sometimes feels like magic money, because it’s often about making a dream come true, which is awesome, but the money is real money and it may or may not be taxable income.
When you filled out your personal information with Kickstarter (or most other crowdfunding sites) that's also you authorizing them to send the IRS the financial details of their campaign at end year. So, in many cases, the IRS knows how much you made. That said, there's some nuance here.
As a starting point, consider that most income is taxable if it is given in exchange for something, usually goods or services (the rewards people get in most cases). Next, note that the IRS does not generally include gifts in your gross income You have to be careful on the definitions of all these words and not assume they mean what you think they mean. When it comes to taxes, words like “gift” and “income” are legal terms with very precise definitions.
There are over 600 websites that offer crowdfunding. The four most common types of crowdfunding are:
- Donation based funding – gifts, with no expectation of anything in return,
- Rewards based funding – rewards may be in the form of goods or services,
- Equity based funding – funding in exchange for equity interest, and
- Loan based funding – allows investors the get interest on their contribution, as well as the return of the amount contributed.
In IRS Information Letter 2016-0036 (March 30, 2016), the IRS provides very basic guidance on the treatment of amounts recipients of crowdfunding receive from contributors. It notes to include crowdfunding is income if it is reward based, or received for services rendered or gains from a sale of property.
IRS Information Letter 2016-0036 concludes that the income tax consequences of crowdfunding depend on all the facts and circumstance surrounding it, and reminds people that they can request a private letter ruling that applies the law to their particular situation.
The first question, generally, is “can this money be considered gifts instead of income”?
Under the Internal Revenue Code you may exclude from your gross income the value of property, including cash, acquired by gift. In determining whether property received is a gift, the IRS looks to the general intent of the donor. To be counted as a gift, the IRS requires that the donor be motivated by a "detached and disinterested generosity," and that the gift arises "out of affection, respect, admiration, charity, or like impulses." Examples of contributions that might be counted as gifts, not income, would be contributions to your campaign in exchange for virtual high fives, thank you letters, or nothing at all.
When looking to the donor's intent, the IRS makes clear that gifts do not include any contribution of property that was motivated by an expectation of something in return. Examples of contributions to your campaign that were likely motivated by the expectation of something in return would be contributions made in exchange for anything of substantive value, such as products, services, other property, or anything else not motivated by genuine charitable impulses.
For many campaigns, some portion of the funds you raise may qualify as gifts, while others may not. While it may be easy to separate the pure donations ($50 for a virtual high five) from the pure sales ($100 for a $100 product), sometimes it’s more ambiguous. The strange part comes when you give something of nominal value, or of clearly less value, than the amount received. For example, let’s say a donor (grandma) contributes $1000 and selects her reward of a custom tie-dyed shirt signed by you, an amateur artist.
Is the shirt worth $1000? Grandma wanted you to have money and wanted to wear your beautiful t-shirt and support you. In this case, you should plan to include in gross income the portion of grandma’s contribution that was fairly motivated by her desire to obtain the shirt. In other words, you’ll have to make a determination about what amount grandma was paying for the shirt, and what amount she was giving as a gift. Remember, if you claim only $20 of Grandma’s $1000 contribution as gross income and the IRS finds out that you normally charge $500 for your custom, signed, tie-dies, they won’t be happy.
What about if you are selling a new gizmo that peels potatoes with lasers? It will sell retail for $150 but to early Kickstarter donors you will sell it for $100. They give you $100 and you plan to / try to / or actually do send them the laser potato peeler. That’s income – you sold them a potato laser.
That’s some information to get your brain going. You are approaching the cutting edge of taxes, congrats.
What about sales tax?
Sales tax is a separate issue from income tax and is done on a state and local level, so we aren’t getting into this. Generally sales tax is based on selling tangible goods, you collect it and pass it on to the state. It is usually charged where your company has a physical presence, but states interpret “having a presence” differently.
If possible, have your Kickstarter end and spend the money on your project in the same fiscal year (the default fiscal year is the calendar year).
We won’t go into all the details right here, but if you plan ahead and can arrange your Kickstarter to end in, let’s say, July and you spend every cent, or more, on your project, by, let’s say, November, then come tax time in April, you shouldn’t have any profit from the Kickstarter money. And you only pay income tax on the profit.
One issue that people run into is that their Kickstarter to produce an album ends in November, say they were funded for $10,000. And in December they start making their album, they spend some time in the studio and spend $1,000. Depending on how you account for that money (and whether it’s taxable) it can look on December 31st that you have a $9,000 profit. Really you might spend a lot of that money in the following year, but our tax system is run on the calendar year, so whatever you have on December 31st is profit. We're simplifying a lot of things to get this point across. This isn’t a hard rule or something that applies to everyone, it’s another issue to think about.
Again, none of this should be used as tax, accounting, or business advice. You are probably very smart, so you know that your situation is much more complicated than can readily be addressed in a one-sided FAQ. You also understand that it is not a smart idea to base any major decisions, including tax decisions, on this article alone. Real money may incur real taxes, and real taxes often benefit from expert help. Nothing in this communication, including attachments and enclosures, is intended as a thorough, in-depth analysis of specific issues, nor a substitute for real live tax advice, legal advice or a formal opinion, nor is it sufficient to avoid tax-related penalties.
- Commissioner v. LoBue, 351 U.S. 243, 246,
- Robertson v. United States, 343 U.S. 711, 714,
- IRS Information Letter 2016-0036,