Beware of the tax and accounting treatment of the amounts that you received from crowdfunding campaigns.
The money that you collect or that has been collected on your behalf through a crowdfunding campaign is taxable unless federal income tax law expressly excludes them from taxable income. Therefore, you should report on your U.S. tax return, the money that you collect through a crowdfunding campaign unless they are:
- Gifts made out of the contributors’ detached and disinterested generosity, and without the contributors receiving or expecting to receive any goods or services in return.
- Loans: The contributors expect you to reimburse the money that they gave you.
- Contributions that you solicit on behalf of others and distribute entirely the money raised to those for whom the crowdfunding campaign was organized. The person to whom you distributed the money may have to report the contributions that they received on their tax return.
- Capital contributed to a business in exchange for the entity’s stocks or an ownership interest.
Examples of crowdfunding campaign scenarios and the related tax treatment:
- Company and employee: The IRS notes that if an employer made contributions to a crowdfunding campaign to an employee or for the benefit of an employee, then the contributions should be included in the employee’s salary.
- Company and fundraising: You may have to file a gift tax return if you give more than $16,000 in 2022 to a crowdfunding campaign that benefits an individual or certain organizations.
- Amount of a one-time donation: If you’re a business and raise capital, loan or crowdfunded proceeds that you should include in business income, you need to determine what expenses you may deduct for tax purposes and how to account for the transactions.
Crowdfunding is a popular method of soliciting money from the public through the Internet for personal reasons, to support others, to finance a business venture. The worldwide crowdfunding market size was estimated at $12.27 billion in 2020. It is projected to grow to $25.80 billion in 2027. North America and Asia are the largest crowdfunding markets. The crowdfunding campaign may be:
> A donation-based crowdfunding: The campaign is set up to collect money to support a specific cause. No goods or service will be provided to the contributors.
> A reward-based crowdfunding where individuals contribute to a project or business with the expectation of receiving at a later stage a non-financial reward in exchange for their contribution. The non-financial reward could be goods or services. Example: a start-up offers a unique service (rewards) or a new product (pre-selling) in exchange for investment.
> A peer-to-peer lending: This is sometimes called crowdlending where companies may borrow directly from hundreds of individuals. Internet-based platforms are used to match lenders with borrowers.
> An equity-based crowdfunding: It consists of selling a stake in your business to a number of investors in return for investment. Internet-based platform is used to match companies with would-be angels.