Lurking beneath every silver lining is a dark cloud. In the case of crowdfunding, that cloud is taxes. If you raise money via crowdfunding via sites like Kickstarter, there is a very good chance that the funds are taxable. The situation is a little complex, since there are four crowdfunding scenarios (at least) that are taxed differently.
- The Kickstarter Model: This kind of crowdfunding has been around for a few years and is often called “donation crowdfunding”. That is somewhat misleading, tax-wise. On Kickstarter and similar sites, you send in money to worthy projects in return for some nominal payment. For example, if you contribute money to a commercial musician’s project to create a CD, your payment might be an autographed copy of the CD when it is released. From the point of view of the Internal Revenue Service, that transaction is a purchase, and the money received by the musician counts as income. Kickstarter keeps track of how much you raise, and if it exceeds a threshold of $20,000 from more than 200 contributors, you will receive a Form 1099-K, a brand new tax form for third-party payments above the threshold. For Kickstarter, the 1099-K is issued by Amazon Payments. Other donation crowdfunding websites may have different procedures. Just because the funds are taxable doesn’t mean you’ll actually pay taxes on them. You first to get to deduct business expenses, and we’ll bet there’ll be nothing left over to tax.
- Gifts: If the crowdfunding contributor gets nothing in return for their money, the contribution is considered a gift and is not taxable to the recipient. The contributor may owe gift tax if the amount given exceeds $13,000 a year. A recent campaign raised $700,000 for a bullied kid, tax-free
- Non-Profits: If you contribute to a crowdfunding non-profit 501(c)(3) organization, the donations are tax-free to the recipient and tax-deductible to the donor.
- Equity Crowdfunding: The JOBS Act of 2102 created equity crowdfunding, which will become operative at the beginning of 2013. That’s when equity crowdfunding portals go live, assuming the Securities and Exchange Commission meets its deadline to finalize the relevant regulations. At these portals, you invest in private, restricted securities issued from startup companies. As such, your investment is a capital contribution, and is not taxable to either party. Of course, if you sell the shares in the future (once they become unrestricted) you may owe capital gains tax on any realized profit.