Briefly Taxing
Is Donation-Based Crowdfunding Taxable?
A Primer on Giving, Receiving, and Clown College
As a tax attorney, it is not wholly uncommon for an old friend to come out of the woodwork with a tax question or six.
Thus, when my sophomore roommate’s wife called me on a Sunday afternoon not too long ago, I knew that there was a fair to middling chance that her desire to reminisce about our days at dear old Wake Forest would quickly fade into a discussion of the internal revenue laws.
On Clown College and Crowdfunding
This friend — lets call her “Matie” (which, yes, is short for Mathryn) — has two brothers. The elder brother is an engineer, living in southwest Florida, while the younger brother focused all of his energy on the circus during his six years at Florida State.
I had so many questions.
It turns out that circus folk and carnies are not unionized, nor do they often have health insurance. Thus, when Bozo the Brother needed a liver transplant, his actual family (not the dwarf or the bearded lady, by whom Bozo had been figuratively adopted) was left to foot the bill.
The engineer, being a practical fellow, did what any millennial in his position would do if faced with the same unfortunate turn of events. He turned to the internet to beg for money. More specifically, the engineer started a GoFundMe page to raise the funds needed for the surgery.
Matie’s father, who I learned was something of a worrywart, did what every self-respecting armchair lawyer would do. He Googled the tax consequences of crowdfunding. As he read through the numerous message boards, he came upon something that concerned him greatly.
Someone (likely operating under the username “TaxesforN00bs”) wrote that if a crowdsourcing campaign raises over $20k or has more than 200 transactions during the calendar year, GoFundMe will issue the creator of the campaign an Form 1099 reporting the income, which 1099 will also be sent to the IRS.
Matie’s father was apoplectic.
What effect was this going to have on the son with the healthy organs? He called Matie, his voice quavering, and explained what he had “learned” on the interwebs. Luckily, Matie was familiar with Briefly Taxing — hence the out-of-the-blue call that fateful Sunday afternoon.
So, what are the tax implications of crowdfunding?
To answer that question, we need to understand the three basic flavors of soliciting money from the masses.
Crowdfunding in a Nutshell
The first flavor is reward-based crowdfunding. Pay a specific amount, and you receive a tangible good or service in return. This is not so very unlike buying a Slurpee and a Slim Jim at a 7-Eleven (aside from the head-freeze and heartburn). It is a taxable event, meaning that the creator receives taxable income, which it must report on their return.
The second is equity-based crowdfunding. As the name implies, the backers of the project receive a piece of the pie in the venture based on the size of their payment. Depending on the type and success of the venture, this equity can become quite valuable. As with stock purchased low and sold high, the backer will have reportable capital gains if it later sells its share in the venture.
Finally, we circle back to Bozo with donation-based crowdfunding. Under this method of crowdfunding, a backer receives nothing but the overwhelming satisfaction of moral superiority for its modicum of charity. But the campaign isn’t a charity — not from the IRS’s standpoint, at least.
So how is this transaction taxed?
Let me start by saying that there is not a whole heck of a lot of guidance when it comes to the taxability of donation-based crowdfunding. Because of the dearth of institutional knowledge, we’re left to look at general principals of income taxation.
When Income Isn’t Income
One of the foundational rules of the internal revenue laws in America is that income, from whatever source and of whatever kind, is taxable. Unless it’s not. One of the exceptions to the broad inclusionary rule is that gifts are not taxable to the recipient. If the gift is big enough, the donor may have to report it, but, for crowdfunding purposes, the $25 I chipped in to buy Bozo a new liver had no effect on my taxes.
Unlike pornography, about which Justice Potter Stewart famously said, “I know it when I see it,” a gift has been rigidly defined by the Supreme Court. It is property or services given without the expectation of receiving anything in return. It is given out of the goodness of your heart and out of affection, respect, admiration, charity, or similar impulses.
When I filled out my credit card information on GoFundMe and hit enter, I did not expect to receive anything other than a note expressing gratitude — which I am still waiting for, Matie… When a backer receives nothing in return for their donation, it is a gift, and the campaign’s creator will not report any income therefrom.
To this end, sites like GoFundMe even have special forms that the campaign’s creator may use to prove to the IRS that the payments were donations, if the IRS comes a-knocking — which it has been known to do…often and insidiously.
But what about the Form 1099 that so spooked Matie’s father?
Sites like Kickstarter and Indiegogo are required to send a Form 1099-K to the creator of the campaign if it raises more than $20,000 or has more than 200 transactions during a calendar year. Remember, however, that a Form 1099 reports income. Because of this, a 1099-K will not be sent to Matie’s brother, because he has no income to report.
Matie followed up with me a few days later to thank me for the advice and to let me know that it reduced her dad’s heartrate to something below that of a field mouse (310 beats per minute on the low end — if you were curious).
Briefly Taxing is not your typical tax blog. As Emily Dickinson might have said, we tell all the tax, but we tell it slant. It is a source for the latest developments in U.S. taxation with a dash of humor, a pinch of wit, and a heaping helping of sarcasm and not-so-passive aggression. Simply put, Briefly Taxing offers a churlish take on taxes.
