{"id":22082,"date":"2017-03-20T14:00:00","date_gmt":"2017-03-20T14:00:00","guid":{"rendered":"https:\/\/www.hrblock.com\/tax-center\/newsroom\/crowdfunding\/"},"modified":"2024-07-29T12:10:43","modified_gmt":"2024-07-29T17:10:43","slug":"crowdfunding","status":"publish","type":"newsroom","link":"https:\/\/www.hrblock.com\/tax-center\/newsroom\/income\/other-income\/crowdfunding\/","title":{"rendered":"Last-minute tax surprises: crowdfunding\u2019s consequences"},"content":{"rendered":"

Crowdfunding has proliferated in the last several years as both a way to raise money for business or creative projects as well as to donate to people in need. Funders and campaign organizers might not think about it again, especially if it is a one-time project or a small part of a much larger event.<\/p>\n

But then tax season rolls around and a 1099-K shows up in the mail reporting the financial transactions. The IRS gets the same information and likely will audit the taxpayer\u2019s return if it doesn\u2019t include that income. Mike Slack, tax attorney at The Tax Institute<\/a> at H&R Block, said the IRS has been sending more notices to taxpayers who received a 1099-K but did not report the income.<\/p>\n

However, the way a taxpayer should report the income will vary by situation and could result in very different outcomes.<\/p>\n

\u201cHow taxpayers should report the amounts on this form on their tax returns varies depending on the nature of the payments,\u201d said Slack, pointing out that \u201cthe tax implications can be surprising for taxpayers who don\u2019t look into the potential results of their campaigns and\/or donations.\u201d<\/p>\n

Crowdfunding creative ventures<\/h2>\n

Although some taxpayers may use crowdfunding platforms to keep up with their hobby, Slack says it is likely the IRS will consider the activity to rise to the level of a business.<\/p>\n

\u201cIf the campaign organizer\u2019s intent is to generate funds for a project that would otherwise be considered a trade or business if viewed outside the context of the fundraising website, any funds raised will be treated as taxable business income,\u201d said Slack. \u201cThe clearest example is when backers will receive products or services in exchange for their contributions.\u201d<\/p>\n

The disadvantage of being considered a business is the organizer could owe self-employment tax<\/a> in addition to income tax on the funds. However, the advantage is they could deduct their business expenses<\/a> even in excess of their income. Hobbyists can only deduct expenses to the extent of their income.<\/p>\n

Crowdfunding donations<\/h2>\n

Crowdfunding for charitable or personal causes, like for medical costs or wedding gifts, can touch on the tax situations for both the giver and recipient. People who make charitable contributions should be tracking those donations so they can see if it is to their advantage to itemize their deductions. If they are tracking these expenses, they may think their donation to a friend\u2019s medical fund will be another itemized deduction. However, these donations are not deductible.<\/p>\n

Only contributions to qualified charitable organizations, which can be found using the IRS charity search tool<\/a>, are tax deductible, \u201cno matter how charitable the intentions of crowdfunding campaigns may be,\u201d said Slack.<\/p>\n

So while the funder won\u2019t be able to deduct their gift, in some extreme cases they may have to pay a gift tax<\/a>. This is only true for gifts greater than $14,000 to a single individual so it is not likely to affect many crowdfunding campaigns. Learn more about taxable gifts<\/a>.<\/p>\n

For the recipients, the funds will typically not be taxable if the giver does not receive something for their contribution. However, they may still receive a 1099-K if the campaign had more than 200 contributors and raised more than $20,000. Because the IRS will have this information, it will likely send a notice<\/a> asking about \u201cunderreported income.\u201d That does not mean the taxpayer needs to pay taxes on the amount, but the taxpayer should have documents and records to show the IRS why the funds are not taxable. Taxpayers should also speak to a qualified tax professional if they receive an IRS notice or come under an audit<\/a>.<\/p>\n

For more information, read Slack\u2019s article Crowdfunding: One platform with many tax results<\/em><\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Crowdfunding has proliferated in the last several years as both a way to raise money for business or creative projects as well as to donate to people in need. Funders and campaign organizers might not think about it again, especially if it is a one-time project or a small part of a much larger event. 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