Did you make money this past year with crowdfunding?
You’re not alone.
The fundraising technique was responsible for billions of dollars from donors all over the world.
Despite this, there’s still a lot of confusion about crowdfunding and taxes.
What the IRS Has to Say About Crowdfunding and Taxes
In a word, nothing.
You can literally search the entire IRS website, and you won’t find a single mention of crowdfunding, even though it’s been used now for years.
Congress has been similarly quiet on the topic.
Of course, don’t interpret that to mean they won’t have something to say about it if you decide not to claim money earned through crowdfunding on your tax filings.
Instead, it’s best to apply established tax principles and use a bit of common sense when preparing your taxes.
Taxes and the 2 Different Types of Crowdfunding
To do this, we need to take a look at the two types of crowdfunding, as the type you’re using will have the most significant effect on the taxes you should pay.
1. Donation-Based Crowdfunding
As the name suggestions, donation-based crowdfunding involves donors pledging money to a cause or project without any expectation that they’ll be repaid through some type of reward for their gift.
The IRS doesn’t tax donations, so there’s no reason to think they would start simply because you’re using crowdfunding to acquire them.
That said, if you are not a qualified charity, then your donors can’t deduct their contributions. This doesn’t affect your tax filings, but it might be worth telling donors, so they’re not disappointed later.
2. Reward-Based Crowdfunding
Reward-based crowdfunding is the kind utilized on popular sites like Indiegogo and Kickstarter.
In exchange for their money, you “reward” donors with various gifts.
This exchange most likely qualifies as a transaction and, thus, you should pay income taxes on the money you make from this kind of crowdfunding.
In fact, you raised more than $20,000 this year and had at least 200 transactions, you should have received a 1099-K form.
What About Sales Taxes?
Here’s where there’s another gray area between crowdfunding and taxes.
Again, the IRS hasn’t specified how crowdfunders are supposed to pay sales taxes, so we’re left to use common sense.
If the product or service you gave the donor in exchange for money is subject to sales tax in your state, you should pay it.
If your state requires you to collect sales tax on out-of-state residents who make online purchases, you should pay it.
Get Professional Help Before Filing Your Taxes
As you can see, the question about paying taxes on your crowdfunding donations is a tricky one. Even if you’re 100% sure on what you need to pay – and what you can deduct – you’ll have a mountain of paperwork to get through.
The question of sales tax can significantly add to that mountain, too, depending on the nature of your crowdfunding.
Marshall, Wazcheka and Patrick, CPA is here to help. Got any bookkeeping, tax planning, and accounting questions? Contact Us today and let us know about your crowdfunding campaign(s) and we’ll get started on putting your tax filing together right away.