The IRS recently issued a reminder to taxpayers regarding the tax implications of crowdfunding contributions and distributions, a timely notice as the popularity of online crowdfunding continues to grow. Whether funds are raised for personal causes, charitable endeavors, or business ventures, taxpayers and their Enrolled Agents should be aware of the associated tax responsibilities.

Understanding Crowdfunding Income

Crowdfunding involves raising small amounts of money from a large number of people, typically via online platforms. The IRS emphasizes that, depending on the circumstances, funds received through crowdfunding may be considered taxable income. Taxpayers must report the income unless it falls under certain exceptions, such as qualifying gifts.

When Crowdfunding is Taxable

Taxpayers must include crowdfunding proceeds in their gross income if:

• The funds are used for business purposes.
• The contributors receive something of value in return.
• The taxpayer does not demonstrate that the funds are gifts.

Funds used for a business or those that provide contributors with rewards or perks are almost always taxable. On the other hand, if the funds are given freely and without expectation of return, they may qualify as non-taxable gifts.

Reporting Requirements

Crowdfunding platforms and payment processors might issue Form 1099-K if the total payments exceed certain thresholds, typically $600. Taxpayers and their Enrolled Agents should ensure that they report this income correctly, even if they do not receive a Form 1099-K. Failure to report income accurately could result in penalties, additional taxes, or other sanctions.

Gifts vs. Income

A key consideration for taxpayers is distinguishing between gifts and income. A gift, as defined by the IRS, is money transferred to another person without the donor expecting something in return. If the funds raised meet the IRS criteria for a gift, they may not be taxable. However, the donor’s intent and the specific facts and circumstances surrounding the transaction are crucial in making this determination.

Documenting Contributions

Proper documentation is essential for both taxpayers and those who contribute to crowdfunding campaigns. Taxpayers should keep detailed records of all funds received and spent, including the purpose of the crowdfunding campaign and the intent behind the contributions. This documentation is critical if the IRS questions the nature of the funds during an examination.

Action Steps for Enrolled Agents

As trusted advisors, Enrolled Agents should educate their clients on the tax implications of crowdfunding. Advising clients to maintain accurate records, understand the distinction between gifts and income, and comply with reporting requirements can prevent future tax issues.

For more detailed guidance, Enrolled agents can refer their clients to the IRS’s Fact Sheet on this topic and other resources available on the IRS website.