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Crowdfunding: Federal Income Tax Considerations

Crowdfunding, the practice of going directly to the public for financing, is an increasingly important strategy for raising money. Social media and various crowdfunding platforms facilitate direct access to the public, and media stories about campaigns going viral suggest endless possibilities. Crowdfunding is still evolving, and the wide variety of projects, platforms, and pitches suggest new questions for many areas of the law — from intellectual property, to securities regulation, and, of course, to tax law. Although the means of funding may be novel, once a particular project is categorized, the federal income tax law for the selected category is often settled — or at least as settled as it is for taxpayers using more traditional financing paths. The challenge is to sort the diverse features of crowdfunding into established tax categories. That sorting almost always depends on the facts and circumstances, and such tests introduce at least some uncertainty.

This special report begins with a brief overview of crowdfunding, organized with a view toward applying federal income tax law and then reviews the scant amount of available administrative guidance, and turns to a discussion of various federal income tax rules of particular relevance to the taxation of crowdfunding. Finally, it concludes with possible avenues for future administrative guidance.

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