This post was originally published August 3, 2016 and extensively updated November 24, 2017.
The rise of the internet has brought new possibilities and sources for raising money online. With the increasing popularity of GoFundMe accounts, a donation-based crowdfunding site, and other crowdfunding sites, we are getting more and more questions about the tax consequences of using these sources for funding.
Types of Crowdfunding
There are three different types of crowdfunding, and the tax implications of each differ significantly. The best one for you depends on your situation and what you want the end result to be. The three types of crowdfunding are: reward-based crowdfunding, equity crowdfunding, and donation-based crowdfunding.
With this type of funding, a company offers consumers products or experiences in exchange for pledging money to help start their project. In most cases, proceeds obtained from the campaign are taxable as income to the company. Any related expenses usually offset this income. An common example of reward-based crowdfunding would be Kickstarter.
Equity crowdfunding is a way for companies to obtain equity investors in their company. The SEC regulates this type of funding. The proceeds obtained through equity funding are not taxable to the company because they represent capital in the company.
Donation-based crowdfunding is one of the most popular sources of crowdfunding. If you’ve heard about someone who has tried to raise funds for medical needs, home renovations, or funeral arrangements, they most likely used donation-based crowdfunding. It is one of the easiest ways to solicit gifts from friends, family, and even strangers for a cause.
As you can see, this type of donation is much different than the first two. So what are the tax implications when you set up an account to receive, or donate to, these funds? Is crowdfunding taxable income?
Are Proceeds From A GoFundMe Account Taxable?
In most cases, the funds received through a donation-based site like GoFundMe are not taxable. They are considered personal gifts, which aren’t taxed as income.
Are My Donations Tax-Deductible?
If you donate to a cause on GoFundMe, you may or may not have to pay taxes on GoFundMe donations.
If you donate to a IRS-approved 501 (c)(3) organization through GoFundMe, then your donation is tax-deductible, according to charitable gift tax laws. If you donate to a person, (for medical expenses, funeral expenses, or just because), however, you can not deduct the gift on your taxes.
In this article, we’re going to focus mostly on donation-based crowdfunding tax implications.
Is GoFundMe Tax Free?
IRS requirements are often confusing, and crowdfunding tax treatment is no exception.
IRS GoFundMe Requirements
Crowdfunding sites, like GoFundMe, are legally required to file a Form 1099 with the IRS for campaigns that receive over $20,000 in donations or over 200 donations. This requirement has caused some confusion among individuals who start a GoFundMe account and receive donations over the $20,000 limit and even at the IRS.
Why the confusion? For most people, a 1099 indicates taxable income that needs to be reported on their tax return. However, as mentioned above, donation-based crowdfunding is not taxable. While you should report crowdfunding on your tax return, this does not automatically make it taxable.
Filing Form 1099 for IRS GoFundMe Donations
To eliminate some of the confusion, you should record the 1099 income on your tax return as other income. Then, on another other income line, report an offsetting reduction for the same amount. You can also add a short explanation of the reason why it is being considered nontaxable.
If you fail to correctly file your crowdfunding donations, you might experience other problems later on. Recently, the IRS sent a cancer survivor a tax notice for $19,000 related to back taxes and interest after she received a 1099 for proceeds on her GoFundMe account. The IRS claims that her proceeds should have been claimed as income.
Basically, the IRS received a copy of the 1099 showing proceeds and tried to match it up to her tax return, but she didn’t record the income on her return. Without her recording the income the way we have suggested, the IRS has no way to know that the proceeds should not be taxable.
Trying to sort this out with the IRS after the tax return has been filed can create a lot of headaches and frustration.
Other Popular Crowdfunding Sites
In addition to GoFundMe, there are other crowdfunding sites like Kickstarter and Indiegogo.
- Kickstarter: Kickstarter is a reward-based crowdfunding site. If you donate to a campaign, you can help bring projects to life with your donations. For example, thousands of people donated to the Veronica Mars Kickstarter campaign to have a movie made. Those who donated received a special gift depending on their donation amount.
- Indiegogo: Similar to Kickstarter, you can donate to a campaign to bring projects to life. Donors also receive incentives for giving money to the project.
If you are considering using one of these crowdfunding accounts, it is important to consider the tax implications of each before jumping into it. If you are unsure about your unique situation, reach out to CMP and we’ll help you determine any tax implications you should consider.