We’ve all heard the stories of crowdfunding appeals that go viral. Whether it’s a musician raising money to produce an album, an inventor with a great idea, or a family in distress that needs help, crowdfunding through platforms such as Indiegogo and Kickstarter has become a common way to raise funds.
Once all the money comes pouring in, the obvious question is, “Do I have to pay taxes on the contributions, and if so, at what rate?”
Because crowdfunding is so new, there is little guidance from the IRS on how to categorize contributions for tax purposes.
In the Bloomberg BNA Tax Management Memorandum article “Crowdfunding: Federal Income Tax Considerations” (Aug. 17, 2017), Professor Charlene D. Luke of the University of Florida Levin College of Law discusses the main types of crowdfunding, available administrative guidance, relevant federal income tax rules, and possible avenues for future administrative guidance.
Crowdfunding can be divided into four main types by looking at the returns expected by the contributors to the project:
In many cases, current tax law contains guidance that can be applied directly or by analogy to crowdfunding, but much of this guidance requires facts-and-circumstances decision-making.
Luke says that more IRS guidance is necessary. For example, guidance could specify a gift safe harbor for crowdfunding related to various educational or artistic productions that will be accessible to the public, where the project creator is an amateur, and the dollar amount received is below a particular threshold. Similarly, guidance regarding when a crowdfunding project rises to the level of business, and the beginning date for that business, would also address an area of uncertainty. For advance payments, the IRS could construct a deferral rule specific to crowdfunding but consistent with the deferral rules already present; it could potentially allow even cash-method taxpayers to elect into such deferral rules (which would prevent them from taking the position that the contributions were excludible gifts).
If you are a Bloomberg BNA subscriber, click here to read the full article.
Not a subscriber? Download the article here.
Get a free trial to Bloomberg BNA Tax & Accounting, a comprehensive tax research solution designed by tax practitioners for tax practitioners.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)