How Do Taxes Apply to Money Raised Through Crowdfunding?

 Posted on April 20, 2022 in Taxation Law

The internet has allowed many people to pursue opportunities that had not previously been available, including when raising money for business purposes or to support charitable causes. “Crowdfunding” has become a popular way to raise funds, and multiple platforms are available for people and businesses that are looking to connect with individual people and receive donations or sell products or services. For example, Kickstarter is a platform that many people and businesses use to raise funds to publish books, record and release musical albums, create video games, or pursue other opportunities. Platforms such as GoFundMe have also helped people raise money for charitable purposes through donations, such as to pay for medical bills. As these platforms become more popular, these who receive money through these methods will need to understand their tax reporting requirements and the situations where they may need to pay income taxes on the money raised.

Form 1099-K and Crowdfunding

Crowdfunding websites or services are required to report distributions of money to recipients in certain cases. This is done by filing a form 1099-K with the IRS, and a copy of this form will also be provided to the person or organization that has received funds. For tax year 2021 or any previous years, the reporting threshold for Form 1099-K was only met if a person received a total at least $20,000 through donations or other transactions from at least 200 people. However for tax years beginning January 1, 2022 or later, this threshold has been lowered to $600. If a person receives at least this amount, regardless of the number of transactions or donations, a Form 1099-K will be required.

Form 1099-K may be filed by a crowdfunding website or by a payment processor that receives payments from contributors and distributes the amounts raised to a recipient. While this form will be required in cases where contributors receive goods or services in return for their payments, it may not need to be filed in other cases, such as when people make charitable donations to a crowdfunding campaign.

Taxes on Money Received Through Crowdfunding

Money received through a crowdfunding campaign will generally be considered taxable income if it is paid in return for receiving goods or services. However, charitable donations made to these campaigns may be considered gifts rather than taxable income. To determine whether money received through a campaign is considered a gift, the IRS may look at whether payments were made as a result of contributors’ generosity without the expectation of receiving anything in return. However if an employer contributed to an employee’s crowdfunding campaign, these contributions will generally be considered to be part of the employee’s gross income.

Contact Our San Jose, CA Tax Reporting Lawyer

If you have raised money through crowdfunding, you will want to make sure you meet all requirements when reporting information to the IRS and paying taxes on the amounts you received. Failure to follow the correct procedures could lead to tax audits and penalties for failure to file tax returns correctly or failure to pay taxes owed. At John D. Teter Law Offices, we can advise you on how to handle tax issues related to crowdfunding, and we can help you address any concerns about your tax liabilities. To get legal help with these matters, contact our San Jose tax law attorney at 408-866-1810.

Sources:

https://www.irs.gov/newsroom/money-received-through-crowdfunding-may-be-taxable-taxpayers-should-understand-their-obligations-and-the-benefits-of-good-recordkeeping

https://www.investopedia.com/money-received-through-crowdfunding-may-be-taxable-5223920