Crowdfunding allows individuals and businesses to raise funds online through platforms like Kickstarter, GoFundMe, and Indiegogo. However, money raised through crowdfunding is not always tax-free, and understanding its tax implications is essential to avoid unexpected liabilities.

Understanding Crowdfunding Types and Tax Treatment

Crowdfunding campaigns generally fall into four categories, each with different tax consequences:

  • Donation-Based Crowdfunding: Contributors give money without expecting goods or services. For individuals, these funds are usually considered gifts and are not taxable income, provided donors don’t receive benefits in return. However, if donations are made to a qualified charitable organization, donors may qualify for deductions. Campaigns raising money for business purposes commonly require reporting the proceeds as income.

  • Reward-Based Crowdfunding: Backers receive a product, service, or perk. For example, a creator might offer custom merchandise in exchange for funding. The IRS treats the fair market value of rewards as taxable income to the fundraiser, which must be reported accordingly.

  • Equity-Based Crowdfunding: Investors receive shares or ownership stakes in a business. Proceeds from selling equity are generally not taxable income to the company, but any dividends or capital gains shareholders receive are taxable. Learn more about equity crowdfunding on FinHelp.io.

  • Debt-Based Crowdfunding: Money borrowed from individuals or groups with an agreement to repay. Loan principal is not taxable income, but interest payments made by the borrower are generally deductible expenses and taxable income for the lender.

Tax Treatment for Individuals

Individual fundraisers must consider:

  • Donation-Based Funds: Usually not taxable if truly gifts without consideration.

  • Rewards: The fair market value of any reward received should be reported as income.

  • Business Use: If crowdfunding supports a business or side hustle, funds must be reported as income, and related expenses may be deductible.

  • Debt: Loans received are not income, but interest paid on loans might have tax implications.

Tax Treatment for Businesses

Businesses must report crowdfunding proceeds as income:

  • Reward-Based Income: Total funds received count as gross income. Costs related to producing and delivering rewards reduce taxable income as business expenses or cost of goods sold.

  • Equity Financing: Sale of shares is not income, but distributions to shareholders are taxable.

  • Debt Financing: Loans are not income; however, interest payments are deductible business expenses.

Businesses often receive Form 1099-K for crowdfunding transactions above $600, which reports gross receipts to the IRS.

Reporting Requirements

  • Report all applicable crowdfunding income on appropriate tax forms, such as Schedule C for self-employed individuals or business tax returns.

  • Keep accurate records of funds received, rewards given, and expenses related to the crowdfunding campaign.

  • Platforms typically issue Form 1099-K to recipients exceeding $600 in transactions, making IRS reporting mandatory.

Practical Examples

  • Sarah’s Kickstarter Project: Sarah raised $5,000 making custom mugs, offering mugs as rewards. She reports the $5,000 as business income and deducts the cost of producing mugs as expenses.

  • Jake’s GoFundMe Campaign: Jake raised $3,000 for medical bills with no rewards. Since these are likely personal gifts, this amount is generally non-taxable income.

Common Mistakes to Avoid

  • Assuming all crowdfunding money is tax-free.

  • Neglecting to report income from rewards.

  • Overlooking income reporting from business-related funds.

  • Confusing gifts with taxable income.

Tips for Managing Crowdfunding Taxes

  • Classify your crowdfunding campaign accurately.

  • Maintain detailed financial records.

  • Set aside a portion of funds (typically 20-30%) for potential tax payments.

  • Consult a tax professional if unsure, particularly for equity or business campaigns.

Additional Resources

Understanding how the IRS views crowdfunding income protects you from penalties and helps you plan your taxes effectively. Proper classification, reporting, and record-keeping are key to managing crowdfunding taxes successfully.