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Crowdfunding Revenues Could Be Considered Taxable Income

Posted on in Taxation Law

San Jose crowdsourcing tax attorney, crowdfunding revenues, taxable income,  tax obligations, crowdfunding campaignsRaising money through crowdfunding has become more popular in recent years and its popularity shows no signs of slowing. Kickstarter and Go Fund Me are two popular platforms used to crowdfund.

At its inception, crowdfunding was mostly used by artists like musicians and filmmakers to support projects that were unlikely to be profitable. However, crowdfunding has been used increasingly as an alternative to venture capital fundraising. With people finding new uses for crowdfunding, new questions arise about whether such money is taxable.

Types of Crowdfunding

Crowdfunding campaigns may offer one or several types of considerations (or rewards) in exchange for a contribution. Some campaigns do not offer anything in return, simply the satisfaction of helping a cause.

Other times, contributors are offered something of small value like a trinket with a logo or entry to an event. Another model will repay contributions with interest provided certain conditions are met. There are also various types of campaigns that will offer contributors a piece of the business in exchange. This is called equity interest.

Determining if Income is Taxable, Generally

Generally speaking, gross income includes all income no matter the source, according to IRS Code Section 61(a). Yet some economic benefits will be excluded from what is considered income and will not be taxed because they are specifically excluded by law, or because they do not conform to the definition of gross income.

It should also be noted that funds not actually in someone’s possession will still be considered taxable when those funds are available to be withdrawn within the tax year. A self-imposed restriction on the funds does not constitute a deferment of that income.

Factors to Determine Whether Funds Are Taxable

This is a new area of taxation law, and there have been few cases on which to rely. However, the IRS published an Information Letter, which gives guidance to those involved in crowdfunding.

The IRS stated that generally contributions will be includable income so long as they are not:

  1. Loans that must be paid back;
  2. Funds given to an entity in exchange for an equity interest; or
  3. Funds given for the purpose of being generous without any “quid pro quo.”

The IRS also stated that contributions received are generally considered taxable income if they are for services performed or are profits from a property sale.

Contact a Santa Clara County Crowdfunding Tax Lawyer

The qualified San Jose crowdsourcing tax attorney at John D. Teter Law Offices can help you determine your tax obligation in situations where the law is new or developing. Call our firm today at 408-866-1810.

Sources:

https://www.irs.gov/pub/irs-wd/16-0036.pdf

https://tax.thomsonreuters.com/media-resources/news-media-resources/checkpoint-news/daily-newsstand/irs-examines-tax-treatment-of-crowdfunding/

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