Understanding how taxes apply to money raised through crowdfunding can be difficult. Crowdfunding is a relatively new phenomenon, so there are no cut and dried laws regarding crowdfunded money.
One thing is clear, however, other than the fees they collect, crowdfunding companies and platforms are not responsible for the money you raise through their service, the person crowdfunding is. So, it is important to be cautious and to do your research if you have recieved money through crowdfunding, especially with April 15th just around the corner.
There are four taxable ways money raised in crowdfunding can be categorized: Sales Tax, Income Tax, Equity, or Gifts.
Most crowdfunders do not think of the money raised during their campaign as sales, but given a closer look, much of crowdfunding is pre-selling. If a backer contributes money and in return receives a salable product (CD, DVD, IPhone case, etc.), the money received is from a type of sales, and thus, is susceptible to sales tax. Understand how you gave your prizes to your backers, and then decide whether the funds you raised could be seen as sales by the IRS.
The most likely category that crowdfunding money will be put in is the income category. Since the crowdfunder is earning money for a product or service, which the backer is receiving, the money will usually be labeled as income. This is the most common category that crowdfunding money falls under. It is often seen as the most fitting category, and you have to remember that money is likely not exempt from income tax. However, there may be exceptions for colleges and nonprofits using crowdfunding, so it is best to ask an expert when unsure.
Having funds fall into the equity category is still on hold in the United States. For the latest news on the issue check out this article. If you are outside the US, explore this infographic on one successful investment based platform in the UK.
Gift is the most appealing category to have crowfunding money be labeled under. Section 118 and 102 of the Internal Revenue Code excludes gifts from taxable income, so wanting the money from your crowdfunding campaigns to be labeled as a gift is understandable. However, since prizes are often offered in exchange for a backer’s contribution, the money will not likely be valid gifts. For more details on gifts check out this article.
The most important part of crowdfunding and taxes to remember is to be careful! Taxes are tricky, complicated, and often foreign to non-experts. No one wants an audit or the IRS going after them, so it is best to play it safe when it comes to crowdfunding money. But, if you want your crowdfunded money to be considered tax exempt, be sure to consult a professional.