Crowdfunding has become a popular way to raise capital in a broad range of
tax treatment of
the contributions is not always clear, and the IRS has yet to directly
rule on the subject.
This blog post examines a number of the federal tax questions that may arise for both the contributor
and the recipient.
Crowdfunding is a way, typically on the
Internet, for individuals and entities to
tap into communal funding for a wide variety of projects, from
to supporting artist and software innovation. Initially,
was largely used by musicians, film makers, and other creative
types to raise small
sums of money for projects that likely wouldn't make money. But,
while still a relatively new way to raise funds, its impact is
cases, becoming an alternative
to venture capital.
While crowdfunding allows an entrepreneur to obtain proceeds for a specific project,
what those giving the money get varies considerably depending on how the program is
structured. Sometimes those contributing to a crowdfund get absolutely nothing in return
except the personal satisfaction of helping launch a cause or participate in creating
an innovation that they believe in. Often those contributing or pledging to a campaign are offered "rewards" such as cups
with logo, tee shirts, tickets to an event,
or CDs. Or they might receive the right to have their contribution repaid with interest
if the campaign is financially successful. Or they might receive an equity interest in the endeavor, i.e., a piece of the future profits.
Are contributions reported to IRS?
The first question
that might be asked is whether IRS tracks such crowdfunding payments.
Code Sec. 6050W requires information reporting for certain payments made
settlement of payment card (e.g., a credit card) and third party
(e.g., PayPal). Thus, any payment settlement entity making payment
to a participating payee in settlement
of reportable payment transactions (generally, any payment card
transaction and any third party network transaction) must make a
return for each
calendar year to be filed with IRS, and furnish a statement to
the participating payee (Form 1099-K), that sets out
the gross amount of the reportable payment transactions as
well as the name, address, and taxpayer identification number
(TIN) of the participating
payees. However, a de minimis rule exempts a third party from
reporting of third party
network transactions of any participating
payee if the aggregate payments to the payee by the third party
for the calendar year
do not exceed $ 20,000 or if the aggregate number of transactions
between the third
party and the payee that would otherwise be reportable does not
exceed 200 within
Are the contributions income to the recipient?
61(a)(1) defines gross income as "all income from whatever source
This definition is construed broadly and extends to all accessions
to wealth over which the taxpayer has complete control. As the
Supreme Court explained, a gain "constitutes taxable income when its
recipient has such control
over it that, as a practical matter, he derives readily realizable
(Commissioner v. Glenshaw Glass Co., (Sup Ct 1955) 47 AFTR 16247
Are amounts received by the recipient a nontaxable gift?
- Thus, any receipt of funds or property by
a taxpayer—such as crowdfunding contributions—is presumed to be
unless the taxpayer can demonstrate that the income fits into one
of the narrowly
construed exclusions provided by law. One of those exceptions is
where the amount received was a gift.
Under Code Sec. 102, the value of property acquired by gift is excluded from the
recipient's gross income. Under the Supreme Court's well known
holding in Comm. v. Duberstein, (S Ct, 1960) 5 AFTR 2d 16265 AFTR 2d 1626, the value
of property acquired by gift is excluded if it: comes from a detached and disinterested
generosity; is made out of affection,
respect, admiration, charity or like impulses; is not made from any moral or legal
duty, nor from the incentive of anticipated benefit of an economic nature; and is
not in return for services rendered. Recipients may exclude payments that they receive under Code Sec. 102
if they meet the Duberstein
- Thus, on one side of the spectrum are payments made without the donor receiving an
economic or other consideration,
while on the other are payments from ordinary business or commercial transactions.
Accordingly, if there is a quid pro quo in which the donor receives a tangible economic benefit in return for his contribution,
then there isn't a gift.
- RIA observation:
If the donor receives a particular "reward" for his contribution, does
an economic incentive that would negate a gift? Or is the benefit
that the donor receives so inconsequential or insubstantial as to
be ignored? While not
strictly applicable, the rules on when a donor making a
contribution to a tax-exempt
charity can receive a benefit and still deduct the contribution in
full may be helpful.
They apply when: (1) the fair market value (FMV) of all benefits
received in connection
with the contribution isn't more than 2% of the contribution, or
$105 for 2015,
if less; or (2) the contribution is at least $52.50 for 2015, and
in connection with
it the donor receives only token benefits (bookmarks, calendars,
etc.) generally costing no more than $10.50 for 2015; or (3) the
charity mails or
otherwise distributes free, unordered items to patrons.
Other Questions Include:
Are amounts given subject to the gift tax?
Can expenses in a crowdfunded project be deducted?
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