Crowdfunding and Taxes
The IRS recently released tax guidelines for contributions and distributions from online crowdfunding (FS-20240-28, Aug. 2024). Crowdfunding is a method of raising money through websites by soliciting contributions from a large number of people. The contributions may be solicited to fund businesses, for charitable donations or for gifts. In some cases, the money raised through crowdfunding is solicited by crowdfunding organizers on behalf of other people or businesses. In other cases, people establish crowdfunding campaigns to raise money for themselves or their businesses.
In general, all the money one receives is taxable income. An important exception to this rule is that gifts are not taxable. To be a gift, contributions must be made as a result of the contributors’ detached and disinterested generosity, and without the contributors receiving or expecting to receive anything in return. The IRS notes that if there is an employer matching contribution, that amount will generally be included in the employee’s taxable compensation.
The trickier part of crowdfunding is reporting distributions to the IRS. The American Rescue Plan Act set the threshold for filing Form 1099-K at $600, but that proved to be impractical to implement on short notice. For calendar year 2023 and earlier, Form 1099-K was required if the total payments to one person exceeded $20,000 and resulted from more than 200 transactions. For calendar year 2024 the threshold is lowered to $5,000, as the stricter limits of the law are phased in. Records related to crowdfunding must be retained for three years.
The full IRS guidance may be found at www.irs.gov/newsroom.
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