Jennifer Sheprow – Intern – WithumSmith+Brown, PC
Do you have a dream? What is it that you WANT to do but you may not have the initial capital on hand to pursue that dream… be an innovative home designer, raise awareness for breast cancer, or simply create a website to sell all those clothes in your closet you forgot you had? Well here’s some good news, it’s called crowdfunding and it could be the answer to your dream, and you don’t need a dime to your name to do it. Sounds too good to be true! Lucky for you, it’s true. Crowdfunding is the practice of funding a project by gathering online contributions from a large group of backers. So, if you have over a thousand Facebook “friends” or Instagram followers don’t stop reading now because it’s about to get good. Originally, it was only used to raise small sums of cash but in recent years it’s exploded, just like everything else in the technological field. But if this is something you are interested in, there are some things you are going to need to know.
Tax Treatment of Crowdfunding
One important thing you need to understand is the tax treatment of the funds received using this method. The IRS has turned to the general principles of income inclusion to clarify how funds raised from crowdfunding are taxed.. Generally, gross income includes all accessions to wealth, but just like with any rule; there are exceptions. And these exceptions may be beneficial to you. These benefits arise from the distinction between what is included and what is excluded in your taxable income and the IRS has just defined that. It’s fairly simple actually.
Crowdfunding revenues are includible in income unless:
- The funds are considered loans that must be repaid;
- The funds represent capital contributed to an entity in exchange for an equity interest in the entity; or
- The funds are gifts made out of detached generosity and without any “quid pro quo”. However, a voluntary transfer without a “quid pro quo” isn’t necessarily a gift for federal income tax purposes.
Additionally, the funds from crowdfunding must be included in income to the extent they are received for services rendered or are from the sale of property. The income tax consequences to a taxpayer relies on the facts and circumstances of the crowdfunding effort.
So, if you believe crowdfunding will be the coffee to your Monday morning, make sure you are aware and understanding of the tax treatment of crowdfunding.