Important Tax Guidelines Involving Contributions and Distributions From Online Crowdfunding
Crowdfunding distributions may be includible in the gross income of the person receiving them depending on the facts and circumstances. The crowdfunding website or its payment processor may be required to report distributions of money raised if the amount distributed meets certain reporting thresholds.
Here are some important basics to keep in mind.
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.
Receipt of a Form 1099-K for distributions of money raised through crowdfunding
The crowdfunding website or its payment processor may be required to report distributions of money raised, if the amount distributed meets certain reporting thresholds, by filing Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS.
If required to file a Form 1099-K with the IRS, the crowdfunding website or its payment processor must also furnish a copy of that form to the person to whom the distributions are made. The American Rescue Plan Act (ARPA) clarifies that the crowdfunding website or its payment processor is not required to file Form 1099-K with the IRS or furnish it to the person to whom the distributions are made if the payments are not made in exchange for goods or services.
The reporting thresholds for a crowdfunding website or payment processor to file and furnish Form 1099-K are:
Calendar years 2023 and prior – Form 1099-K is required if the total of all payments distributed to a person exceeded $20,000 and resulted from more than 200 transactions. See Notice 2023-10 and Notice 2023-74.
Calendar year 2024 – The IRS announced a plan for the threshold to be reduced to $5,000 as a phase-in for the lower threshold provided under the ARPA. See IR-2023-221.
Note: The ARPA lowered the reporting threshold for third party settlement organizations (TPSOs) so that TPSOs are only required to report on Forms 1099-K if the total of all payments distributed to a payee in a calendar year exceeds $600, regardless of the number of transactions. However, implementation of this lower threshold has been delayed.
Crowdfunding distributions may be made to the crowdfunding organizer, or directly to individuals or businesses for whom the organizer solicited funds. A Form 1099-K must be filed with the IRS and furnished to the person or entity that received the payments if the reporting threshold is met for the year in which the distributions were made.
A person receiving a Form 1099-K for distributions of money raised through crowdfunding may not recognize the filer's name on the form. Sometimes the payment processor used by the crowdfunding website, rather than the crowdfunding website itself, will furnish the Form 1099-K and will be listed as the filer on the form. If the recipient of a Form 1099-K does not recognize the filer's name or the amounts included on the Form 1099-K, the recipient can use the filer's telephone number listed on the form to contact a person knowledgeable about the payments reported.
Box 1 on the Form 1099-K will show the gross amount of the distributions made to a person during the calendar year. But the furnishing of a Form 1099-K doesn't automatically mean the amount reported on the form is taxable to the person receiving the form.
If non-taxable distributions are reported on Form 1099-K, the recipient should report the transaction on Form 1040, Schedule 1, as follows:
Part I – Line 8z, Other Income – “Form 1099-K Received for Non-Taxable Crowdfunding Distributions” to show the gross proceeds from the distributions reported on Form 1099-K.
Part II – Line 24z, Other Adjustments – “Form 1099-K Received for Non-Taxable Crowdfunding Distributions” to show the non-taxable amount of the distributions reported on Form 1099-K.
The net effect of these two adjustments on income is $0.
Alternatively, if non-taxable distributions are reported on Form 1099-K and the recipient does not report the transaction on their tax return, the IRS may contact the recipient for more information. The recipient will have the opportunity to explain why the crowdfunding distributions were not reported on their tax return. As discussed below, the income tax consequences depend on all the facts and circumstances.
Tax treatment of money raised through crowdfunding
Under federal tax law, gross income includes all income from whatever source derived unless it is specifically excluded from gross income by law. Whether crowdfunding distributions are includible in the gross income of the person receiving them depends on all the facts and circumstances of the distribution.
In most cases, property received as a gift is not includible in the gross income of the person receiving the gift.
If crowdfunding contributions are made as a result of the contributors' detached and disinterested generosity, and without the contributors receiving or expecting to receive anything in return, the amounts may be gifts and therefore may not be includible in the gross income of those for whom the campaign was organized. Contributions to crowdfunding campaigns are not necessarily a result of detached and disinterested generosity, and therefore may not be gifts. Additionally, contributions to crowdfunding campaigns by an employer to, or for the benefit of, an employee are generally includible in the employee's gross income.
If a crowdfunding organizer solicits contributions on behalf of others, distributions of the money raised to the organizer may not be includible in the organizer's gross income if the organizer further distributes the money raised to those for whom the crowdfunding campaign was organized.
Taxpayers may want to consult a trusted tax professional for information and advice regarding how to treat amounts received from crowdfunding campaigns.
Recordkeeping for money raised through crowdfunding
Crowdfunding organizers and any person receiving amounts from crowdfunding should keep complete and accurate records of all facts and circumstances surrounding the fundraising and disposition of funds for at least three years.
To read this original IRS article in its entirety and for more resources, head to this webpage.