Is Money Raised Through Crowdfunding Taxable?

Crowdfunding is an alternative way of raising funds for a startup, requesting donations for a specific charitable cause, or even collecting money for individuals in need. The contributions are usually in small amounts, but the funds raised can be significant. The question is, are funds raised through websites like Kickstarter, GoFundMe, Kiva and Indiegogo taxable? Well, that depends according to the IRS.

Under federal tax law, gross income includes all income from whatever source derived unless it is specifically excluded. One such exclusion is that gifts are not taxable to the recipient. You can rest assured knowing that you haven’t been committing tax fraud all these years by excluding your birthday and holiday gifts from your tax return.

Likewise, amounts you contribute to other people’s crowdfunding efforts out of your own detached and disinterested generosity are tax-free gifts to them, but can be taxable gifts to you if the amount of the gift exceeds $16,000 per year (or $32,000 per year for joint gifts by spouses). However, not all contributions to crowdfunding efforts are given out of detached and disinterested generosity, and this is where the IRS comes in.

Crowdfunding efforts that have a profit motive and deal with the exchange of goods or services is generally taxable to the recipient. For example, if you have a great idea for a product and create a crowdfunding effort to raise money in exchange for a deposit on such product, then those payments may be taxable. Additionally, contributions to crowdfunding campaigns by an employer to, or for the benefit of, an employee are generally includible in the employee’s gross income.

Crowdfunding websites may be required to report distributions of money raised to the IRS on Form 1099-K if the amount distributed meets certain reporting thresholds. Prior to 2022, this threshold was met if, during a calendar year, the total of all payments distributed to a person exceeded $20,000 resulting from more than 200 transactions or donations. For 2022 and beyond this threshold is dramatically reduced to $600 in gross payments, regardless of the number of transactions or donations.

However, The American Rescue Plan Act of 2021 clarifies that Form 1099-K is not required if the contributor to the crowdfunding campaign does not receive goods or services for their contributions. This is great news for charitable crowdfunding efforts as well as personal gifts to individuals that could have faced additional IRS scrutiny if it wasn’t for the passage of this reporting exemption. Now, your grandmother doesn’t have to worry about the IRS coming after the $10,000 you raised for her hip replacement.

The rules relating to the tax treatment of money raised through crowdfunding can be complex so make sure to seek professional advice to ensure proper reporting of any funds received.