Tax Implications of Crowdfunding

Sep 22, 2017

MoneyLife100There are many stories about people who raise money through crowdfunding sites and wake up one day to find a big tax bill in the mail. Generally, organizers of GoFundMe campaigns or other crowdfunding efforts believe that the gifts they receive will be tax free, so they do not report the income on their tax returns. The Pennsylvania Institute of Certified Public Accountants (PICPA) highlights how donations received can be subject to tax if fundraisers aren’t careful. 

Third-Party Transactions

Typically, money raised through a crowdfunding site such as GoFundMe is processed through third-party settlement entities, such as PayPal. IRS rules for those processing entities are very clear regarding the requirement to issue a form 1099-K. If the third-party transaction is a gross payment that exceeds $20,000, and if there are more than 200 of those transactions, then the recipient of those payments is issued a 1099-K.

Reporting Donations

A taxpayer that gets a 1099-K should be prepared to deal with that information on the tax return. Just because a 1099-K is issued, however, it does not mean that the recipient owes taxes on the funds. One potential way to report these funds is to include the amount on the 1040 as “Other Income,” and reflect a negative adjustment in the same amount with the inclusion of a “Statement Concerning” that explains the situation. If appropriate to the endeavor, and in consultation with a tax professional, a statement could read something like this:
  • All amounts reflected in the 1099-K are excludable from income under IRC Section 102. These amounts reflect the money the fundraiser received as the result of gifts from donors. 

Are Your Funds “Gifts?”

How does one truly know if money given was a gift? There is little within the code regarding the definition of a gift, but the tax courts provide some guidance. Gifts result from "detached and disinterested generosity," and are often given out of "affection, respect, admiration, charity, or like impulses."

Each Case Is Unique

The underlying interpretations and rules regarding any GoFundMe account can create significant tax questions and raise significant tax issues for the recipients. Each case is different. If, for example, a now-retired professional athlete has come on hard times and is looking for donations to help with mounting debt and legal bills, a tax obligation is likely for any donations obtained.

When a young, enterprising entrepreneur looking to make her first million seeks donations to aide in the development of her new software product and its launch, those amounts also will be subject to income tax. The profit motive takes away the likelihood of tax avoidance.

Your CPA Can Help

When faced with the need or desire to create a crowdfunding account, it is important to consult with a tax professional who can guide you through the many issues you may face. No case is ever the same, and each person’s individual circumstances will require separate guidance. Turn to a CPA for help. To find a CPA in your area or for more financial tips, visit www.picpa.org/moneyandlife
 
About PICPA

The Pennsylvania Institute of Certified Public Accountants (PICPA) is a premiere statewide association of more than 22,000 members working in public accounting, industry, government, and education. Founded in 1897, the PICPA is the second-oldest and fourth-largest state CPA organization in the United States.

Money & Life Tips are a joint effort of the AICPA and the Pennsylvania Institute of Certified Public Accountants (PICPA), as part of the profession’s nationwide 360 Degrees of Financial Literacy program.


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