Is crowdfunding taxable income?

Jul 14, 2020

Questions regarding various tax regulations are always tricky. Rules that seem so iron-clad in theory are rarely ever in practice and it can result in various instances where the outcome of a monetary move has very different consequences from the original intention.

I was asked recently to donate money to a cause that a close friend of my son was spearheading and was told that it could be written off as a tax exemption (meaning that tax benefits would be rewarded to me in relation to the amount that I would have donated). While this is partially true, it doesn’t have as large of a reach as many believe. For example, it is extremely common for the donator in various situations such as crowd funding websites to not have to pay taxes on the money donated, the party receiving the money could very well wake up one day with a massive amount of money due in taxes. This is extremely unfortunate as those who are raising money can almost never afford to pay such a massive amount in taxes, especially when the money is being raised for extremely personal benefit, such as to pay medical bills (go-fund me). A very common issue also arises when the receiver of the money is not aware that all money received must be documented on an annual tax return. This can lead to issues with the IRS, and typically leads to unintended tax liabilities and the bureaucracy that follows.

Money raised through crowdfunding sites are usually handled in a very regulated fashion, with the processing entities being extremely clear with what is expected. In regards to the requirements in issuing a 1099-K…

The settlement of third-party network transactions above the minimum reporting thresholds of:

  • Gross payments that exceed $20,000, and
  • More than 200 such transactions

Thus, a taxpayer who receives a 1099-k should be prepared to reflect the information on the tax return. Furthermore, just because a 1099-K has been issued does not automatically mean that tax is owed on the money received. One way to report the income would be to classify it under “other income” and reflect a negative adjustment of equal amount with the inclusion of a “statement concerning” the position taken. If appropriate under the specific circumstances and approved in consultation with a tax professional, a statement could read:

All amounts reflected in the 1099-K are excludable from income under IRC Section 102.3 These amounts reflect the money taxpayer received as the result of gifts from donors. Those gifts were used to pay the medical expenses of the taxpayer and are excludable from gross income

The definition of “gift” is problematic as it is so loosely open to interpretation, but the tax courts have provided the definition as “resulting from detached and disinterested generosity, and often given out of affection, respect, admiration, charity or similar impulses.”

As such the specific circumstance and intention with which the crowdfund owner receives the money is extremely important in determining whether the person will pay taxes or not, and as a result it can be difficult to know when it is truly advantageous to utilize certain platforms, and even more difficult to truly know whether all of the boxes are being checked and you are in no danger of being penalized by the IRS. As a result of this, it is highly recommended that you first check with a tax professional before making any serious decisions prior to taking such actions.

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