Odds are you have heard of, contributed to, or created a crowdfunding campaign. Crowdfunding is a fundraising method where donations are requested and gathered on a crowdfunding site for a variety of reasons such as; medical expenses, business capital, charities, or creative endeavors. Crowdfunding is big business too, in North America alone $17 billion was generated through crowdfunding. So as a tax preparer what do you need to know if your client received money from a crowdfunding campaign?
Form 1099-K
Crowdfunding hosting platforms are required to report to the IRS by filling out form 1099-K if certain criteria are met by a campaign. Those criteria are:
- $600 or more in total payments are distributed to an individual in a calendar year.
- Goods or services are promised in exchange for a contribution
If the above criteria are met then the hosting platform must fill out and submit form 1099-K to the IRS and provide a copy to the individual or organization that received the payments.
For Example: Your client has a product they wish to sell, they don’t have the capital to pay for production upfront so instead elect to crowdfund it. That way once the donations are collected they can pay to have the product produced and can then distribute it to their customers who donated. This would fulfill the second criteria for the 1099-K form and the first criteria would be filled depending on if they receive payments in excess of $600.
Exceptions
Just because the criteria was met and the crowdfunding platform sent in a 1099-K form does not necessarily mean the amount reported is taxable. If the amount reported on form 1099-K is not reported on the recipients tax return then the IRS will likely reach out to them and in order to find out more information on why the payments were not reported. Let’s say your client organized and managed a crowdfunding campaign for another party. After the campaign finished they collected the donations and gave them over to the individual or group that commissioned them. In this example your client would not be taxed despite fulfilling the criteria listed above. Furthermore, some people may contribute to a crowdfunding campaign without expecting to receive anything in return, in this instance the money your client receives would be treated as a gift and not taxable. However only the money received as a gift is not taxable, any money received in exchange for goods is still taxable.
Crowdfunding is a good example of the importance that needs to be placed on detailed financial record keeping. If your client has or plans to launch a crowdfunding campaign then you should encourage them to keep all relevant data on the campaign for at least three years so they can be covered in the event of an audit.
*information in this article was provided by irs.gov
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