Crowdfunding is an effective way to raise money for a host of causes: everything from medical bills to travel expenses to business start-up costs. But as with all income, you may have to pay taxes on crowdfunding money earned, whether you are an individual or a business.
Here is what you need to know about crowdfunding taxes.
What Is Crowdfunding?
Crowdfunding refers to raising funds for causes and projects through online platforms and communities. If you’ve ever used a platform like GoFundMe, Kickstarter, or Patreon to raise money for a charitable cause, personal expense or creative endeavor, you have participated in crowdfunding.
Do You Have to Pay Taxes on Crowdfunding?
Because crowdfunding is so new, whether you pay crowdfunding taxes depends on the situation. As a general rule, if you’re offering goods, services, or rewards in exchange for the crowdfunding money you receive, you’ll owe taxes on that crowdfunding income. But if you’re raising the money for a charitable cause, for instance, and the donors aren’t receiving anything in return for their gift, you might not have to claim that crowdfunding money on your taxes.
Crowdfunding 1099-K
Most crowdfunding platforms report the money you earned on IRS form 1099-K. You get a copy of this form, and so does the IRS. Therefore, it is best to err on the side of caution and account for the crowdfunding money reported on your 1099-K when you do your taxes. A tax professional can help you determine whether you need to include the crowdfunding income on the 1099-K you received.
Crowdfunding Contributions to Qualified vs. Unqualified Charitable Organizations
If you make crowdfunding contributions to a qualified charitable organization, you can deduct this money from your taxes. Unqualified charitable organizations, however, are not tax-exempt, and the crowdfunding money you contribute to them is not tax deductible.
Crowdfunding Gift Tax Limit
As of 2022, the gift tax limit is $16,000. This is the maximum you can give to someone as a gift, including crowdfunding, without having to pay a gift tax on your contribution.
Crowdfunding Life Events
Crowdfunding money earned for life events, such as travel or medical expenses, is usually not taxable, as the donor does not receive anything in return for their crowdfunding contribution.
How Is Crowdfunding Taxed for Individuals Who Receive Crowdfunding Money?
Remember, crowdfunding money is usually only taxed when donors get something for their contribution. In the case of individuals, the money earned from crowdfunding is taxed as ordinary income.
How Is Crowdfunding Taxed for Businesses with Crowdfunding Income?
If a business offers anything in exchange for the crowdfunding money they raise, they must report the crowdfunding as business income.
Reward-Based Crowdfunding vs. Equity-Based Crowdfunding
Reward-based crowdfunding involves giving something tangible in return for donations. Equity-based crowdfunding involves giving an ownership interest in your business or venture. Since equity-based crowdfunding is considered an investment, it doesn’t result in taxable income like the proceeds from reward-based crowdfunding do.
Crowdfunding State Taxes
The tax laws on crowdfunding money vary from state to state. A local tax preparer can typically help you determine what state taxes, if any, you are responsible for.
Crowdfunding Business Expenses
Even if your crowdfunding income counts as business income and is thus taxable, remember you can still deduct any expenses you incurred in obtaining crowdfunding money, which will reduce your taxable income.
How Do You Report Crowdfunding Income?
If you received more than $600 in crowdfunding income in a single tax year, you must report the 1099-K amount when calculating gross income for your tax return.
Can You Deduct Crowdfunding Donations on Your Tax Return?
Yes, you may deduct crowdfunding donations on your tax return if they were made to a qualified charity.
Do You Have to Itemize to Deduct Crowdfunding Donations?
You may deduct up to $300 in crowdfunding donations as an individual and $600 as a married couple without itemizing. Note that this is a temporary IRS law to encourage charitable contributions and it may change.
The $300 (individual) and $600 (married couple) amounts include your total charitable contributions for the tax year, whether crowdfunding and/or other donations.
How Long Do You Have to Keep Crowdfunding Records for Tax Purposes?
You should keep all records pertaining to your crowdfunding activities for at least three years.
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