Information for those giving, receiving, and organizing.
Have you donated money to a crowdfunding campaign this year? You probably have. You may be wondering how the Internal Revenue Service treats these donations. Do the common tax rules apply?
The I.R.S. may or may not define such donations as charitable contributions. It depends not only on who the crowdfunding is for, but also who has organized the campaign.
A donation to a qualified non-profit organization – a 501(c)(3) – is tax deductible if it is properly documented and itemized on Schedule A. Donations to crowdsourcing efforts administered by 501(c)(3)s are, likewise, tax deductible.1
If an individual sets up a crowdfunding campaign to raise money for another individual or a cause or project, it is highly unlikely that a 501(c)(3) organization is in place to accept the donations. (An organization can attain such status faster these days, thanks to the Internet, but attaining it still takes time.)
So, if you donate to a crowdfunding campaign that is simply created by a person to benefit a specific person or a group of specific persons, the donation will likely not be tax deductible, as no qualified charitable organization will be there to receive and distribute the money.1
There is a “middle ground” here that warrants further explanation. Sometimes you see a crowdsourcing effort created by an individual on behalf of what is termed a “charitable class.” These campaigns do not simply benefit one or more people that the organizer already knows. Rather, they benefit a community of people (perhaps, many people) that the organizer does not know.
If you give to such an effort, an income tax deduction may be possible if the campaign aligns with a qualified charity. If the qualified non-profit organization assumes full control over the collected donations and takes full possession of them, then a charitable deduction by the donor may be permitted.2
When donations are taken on behalf of a charitable class, they do not necessarily become present interest gifts. Still, a gift tax charitable contribution deduction may not be allowed.2
If you receive crowdsourcing contributions, are they characterized as gifts? Usually, they are considered gifts under federal tax law and not counted in your gross income – but there are some exceptions to this.2
If a donation you receive constitutes a loan, or if a donation is made to you with what the I.R.S. calls “detached and disinterested generosity,” then such a donation represents taxable income. The same holds true if crowdfunding donations amount to venture capital, payment for services rendered, or a percentage of gain from the sale of property.2
Some creators of crowdfunding campaigns may receive 1099-Ks. This is the federal tax form used to report payment card and third-party network transactions, and like all 1099 forms, it goes out within the first few weeks of a calendar year. If your campaign generates at least 200 transactions or $20,000 or more in gross payments during a single year, the crowdfunding site or the payment processing company it uses will send you one.1
The I.R.S. has not made formal rulings on crowdsourcing. Perhaps some will be made soon, if only to clarify some of the gray areas that now exist.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Securities and investment advisory services offered through Geneos Wealth Management, Inc. Member FINRA/SIPC
1 – legalzoom.com/articles/cash-and-kickstarter-the-tax-implications-of-crowd-funding [3/17]
2 – wealthmanagement.com/philanthropy/crowdsourcing-tax-confusion [10/20/17]