Is money raised from crowdfunding taxable?
Money raised from donation-based crowdfunding to help someone in need is usually not taxable. If a 501(c)(3) organization is collecting it, then the IRS treats donations to the crowdfunding campaign as donations to the 501(c)(3) organization. If the money is being raised for a certain person, then the IRS typically treats the donations as gifts to that person. In either case, the person or business that receives the donation-based crowdfunding money (the recipient) does not usually pay taxes on it.
Donations to reward-based crowdfunding campaigns are almost always taxable income for the recipient. Sometimes a donor gives to a reward-based crowdfunding campaign without expecting to get something back. The recipient may try to argue that the donation is a gift because the donor did not expect to receive anything of value for it. The IRS likely will not accept this argument if the recipient is a for-profit business, which is the case for most reward-based crowdfunding.
When a business uses reward-based crowdfunding to raise funds, it may still use business expenses to lower the amount of tax it pays, just like any other business. So, even though the crowdfunding money is taxable income, business expenses may lower the income tax the business owes on that income.
Are crowdfunding donations tax deductible?
When something is tax deductible, that means you do not have to count its value as income, which can lower the amount of tax you have to pay. Usually, crowdfunding donations are tax deductible for the donor only if the recipient is a qualified charitable organization, such as a 501(c)(3) nonprofit. Donations to private individuals are usually not tax deductible.
For example, if you donate to a crowdfunding campaign to help a friend who needs money to cover medical bills, that is probably not a tax-deductible donation. The IRS typically sees these types of donations as gifts, which are not deductible.
If you donate to a crowdfunding campaign in which the funds go to a 501(c)(3) nonprofit, then the donation is usually tax deductible. If you receive anything of value for your donation, then the part of your donation that equals the value of what you got for it is typically not tax deductible.
For example, if you donate $100 to the crowdfunding campaign of a 501(c)(3) nonprofit and receive a product worth $60, then the tax-deductible portion of your donation is $40.
Keep in mind that even tax-deductible donations might not provide a tax benefit in every situation. You usually must itemize deductions on your tax return to claim a charitable deduction.
How can crowdfunding creators decide how much money to report on tax returns?
For donation-based crowdfunding campaigns for medical or personal support, the crowdfunding creator may not need to report the funds as income on their tax return.
In reward-based crowdfunding campaigns, the money will typically be treated as business income. The recipient usually reports the crowdfunding money as income and lists any business expenses to lower the amount of income subject to tax.
Taxable crowdfunding income is generally taxed in the year the income is received. If business expenses from a crowdfunding campaign occur the year after receiving the funds, this timing difference can result in higher tax for that year. It’s a good idea to pay attention to the timing of your campaign, especially near the end of a tax year.
What legal issues should I think about when crowdfunding?
By crowdfunding, you risk becoming legally responsible for issues that may result from your campaign.
For donation-based crowdfunding to support organizations, it may be smart to partner with an established 501(c)(3), or start your own nonprofit. Crowdfunding for a person’s medical or funeral expenses can be complex, so it can be helpful to seek legal guidance when setting it up.
When you raise funds through reward-based crowdfunding, you essentially start a contract with your donors. It’s common for that contract to be unclear, which can cause legal problems if disagreements arise. To avoid problems, be specific when describing the rewards your donors will receive and realistic about when you can deliver them.
It can also be a good idea to run reward-based crowdfunding campaigns through a business structure, such as an LLC, corporation, or partnership. An attorney can help you decide on the best structure for your situation.
The new product or service that you are crowdfunding for may also be considered intellectual property (IP). Before making it public, consider protecting it through patents, copyrights, or trademarks. It’s also important to make sure your idea does not infringe on someone else’s existing rights.
Many tax and legal issues can arise when launching a crowdfunding campaign. Proper planning before launch can help prevent future problems. If you have questions about legal structures, contracts, or protecting your intellectual property, consider consulting a Legal Pro for guidance.
Please note: This page offers general legal information, not but not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.
