Wondering Whether You’ll Pay Taxes on Crowdfunding Income?

//Wondering Whether You’ll Pay Taxes on Crowdfunding Income?

Wondering Whether You’ll Pay Taxes on Crowdfunding Income?

Whether you’re thinking of trying a crowdfunded project for the first time on Kickstarter, Patreon, Indiegogo, or another crowdsourced platform, or you already have experience funding projects this way, you may be surprised to learn the IRS usually considers crowdfunded donations a source of income. That means you have to pay taxes on crowdfunding income, as on any other income.

This comes as a surprise to many. They think of these platforms as a way for people to make donations, or give gifts of cash, and they don’t think gifts are taxed. Furthermore, as NBC News reports, there’s a lot of confusion among crowdfunders surrounding this issue, “pervasive myths and speculative theories continue to fly online between befuddled artists who have raised funds through crowdfunding.”

Let’s take a look at some of these issues and clarify whether there are taxes on crowdfunding income.

 

Are Crowdsourced Donations Gifts?

One of the main sources of confusion surrounding the issue of taxes on money you receive through a crowdfunded platform is the fact that it’s usually referred to as a donation or pledge, which makes people think it’s a gift and therefore wouldn’t be taxed unless it reaches the Gift Tax level of $14,000 or more. That is, if someone gave you $14,000, you would have to declare it on your taxes by filling out a gift tax form when preparing your tax return. Very few patrons on Kickstarter or other crowdsourcing platforms pledge $14,000 or more.

But are any of those crowdfunded pledges, or donations, actually gifts? The short answer is yes. The IRS considers money a gift if you receive nothing in return for it. So if you give money to a crowdsourced effort to pay someone’s medical bills, that person can consider that money to be a gift. It won’t be taxed, unless it crosses that $14,000 threshold.

But if the giver receives goods or services in return for their donation, that money is considered income for whoever provides the product or service. Even if they just want to knit more hats and ask on Kickstarter for a little help buying yarn–if they send all the people who give them money for yarn one of the hats or any other product, the money they received through that Kickstarter is considered income and has to be mentioned as such on tax returns.

 

What if I Don’t Receive a 1099?

Even if you don’t receive a 1099-K from the crowdfunding platform, if you received money in order to create something you then sent to your donors, that money is considered income. As you can see from Kickstarter’s article, “Kickstarter and Taxes”, crowdsourcing platforms do not have to send 1099-K forms unless the creator receives at least $20,000 that year. This has led many creators to think if they don’t make that much via the platform, and therefore don’t get a 1099 form, they don’t owe taxes.

Remember, if you are receiving money in exchange for goods or services, that money is considered income by the IRS. As such, it is taxable. In addition, you may also have to pay sales tax. The issue of whether or not sales tax is owed is complicated and varies from state to state. If you are receiving income via a crowdfunded platform you should consult with your accountant to learn the details.

 

Failing to pay taxes on crowdfunding income carries the same penalties, fines, and even jail time that failure to pay your taxes carries in general. If you’re concerned or need to know more, reach out to our expert team here at DCA CPAs.

 

IMAGE: Pixabay / CC0 Public Domain

By |2018-08-01T12:39:38-05:00August 10th, 2018|Income Tax|0 Comments

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