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 gets the donation-based crowdfunding money, called 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 the crowdfunding money.
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 people 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 tax 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 get 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 part of your donation is $40.
Remember, even donations that are tax deductible might not have a tax benefit in your specific case. You usually must list all the tax-deductible items on your tax return to benefit from charitable donations.
If you have questions about how donating to the crowdfunding campaign of a 501(c)(3) nonprofit could affect your taxes, you may want to ask a lawyer or tax professional.
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 it as income on their tax return.
In reward-based crowdfunding campaigns, the money will typically be treated the same as any other business income. The recipient usually reports the crowdfunding money as business income and lists any business expenses to lower the amount of income they pay taxes on.
Taxable crowdfunding income is usually taxed in the year you receive the income. If business expenses from a crowdfunding campaign happen the year after receiving the crowdfunding, you may pay more tax. You may want to pay careful attention if you are thinking about crowdfunding at the end of a tax year. Having income and expenses in different years can lead to paying more tax.
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 non-profit. Crowdfunding for a person's medical or funeral expenses can be complicated, so do not hesitate to get legal help when setting it up to make sure things go smoothly during difficult circumstances.
When you raise funds through reward-based crowdfunding, you basically start a contract with your donors. It is common for that contract to be unclear, which can cause legal problems if you disagree with your donors. To avoid problems, it helps to be specific when describing the rewards your donors will get for their donations. It is also a good idea to make sure you can keep your end of the contract by giving them the reward by the deadline.
It is also a good idea to run reward-based crowdfunding campaigns through a business, such as an LLC, corporation, or partnership. You may want to talk to a lawyer to decide on the best business structure for your venture.
The new product or service that you are crowdfunding for can also be called your intellectual property (IP). Before you make it available to the public, you may want to make sure it is protected by any patents, copyrights, or trademarks you need. The last thing you want is to launch your crowdfunding campaign only to have your ideas stolen by another business that can get to market faster. It is also good to make sure your business idea does not use an idea or technology that someone else has patented or legally protected.
Many tax and legal problems can occur when you are launching a crowdfunding campaign. Proper planning before the launch can save you a lot of headaches down the road. If you have questions about launching a crowdfunding campaign, reach out to a Rocket Lawyer On Call® attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.