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2022 Crowdfunding Tax Considerations | Form 1099-K

Whether raising funds for a new business venture or charitable fundraiser, crowdfunding has become a very popular mechanism to quickly organize and raise funds. Kickstarter, Patreon and GoFundMe are a few of the more widely used sites for various causes and means. Crowdfunding facilitates a solicitation of monetary contributions through the form of a campaign from a large number of people at one time.

When is crowdfunding taxable?

Crowdfunding campaign projects in North America generate a whopping $17.2 billion per year.[1] With this steady flow of increased funds, how are these funds tracked and reported? Until recently, they were not. In March 2022, the Internal Revenue Service (IRS) issued a news release that money raised through crowdfunding could be taxable, and taxpayers who are beneficiaries, organizers or even contributors of a crowdfunding campaign may receive a Form 1099-K. Prior to Dec. 31, 2021, a Form 1099-K was required to be filed if the total amount of funds distributed to a person exceeded $20,000 in gross payments from 200 or more transactions or donations. However, after Dec. 31, 2021 the threshold has now been lowered to $600 regardless of how many transactions or donations took place during the campaign.

The American Rescue Plan Act does clarify that for those contributing but not receiving goods or services, the crowdfunding website or the payment processor is not required to file Form 1099-K with the IRS. However, if you receive a Form 1099-K, don’t ignore it, even if you don’t recognize the payor’s name. Often, the payment processor used by the crowdfunding website will issue Form 1099-K instead of the actual crowdfunding website.

Generally, if  you receive a Form 1099-K, the income may be taxable to you in the following scenarios:

  • If you are a campaign contributor and receive goods/services

  • If you are a campaign organizer and the funds were not distributed to the campaign beneficiary

  • If you are a recipient of the crowdfunding campaign and your employer makes contributions for your benefit or if you receive funds from an investor for your new business launch

The mere issuance of a Form 1099-K does not make the funds received taxable to the recipient since the income tax consequences depend on the facts and circumstances. If the contributors to the crowdfunding make contributions with what is known as “detached and disinterested generosity” and without receiving or expecting to receive goods or services, then the beneficiaries can exclude the funds from gross income. Also, if the organizer of the crowdfunding campaign distributed all funds to the campaign’s beneficiaries or intended recipients, the funds raised are not required to be reported in gross income. If the gross amounts reported on Form 1099-K are not included on a recipient’s income tax return, the IRS may reach out to obtain additional information, and the recipient will then have the opportunity to explain the tax treatment of the funds.

As such, it is highly recommended that a detailed account of any crowdfunding campaigns should be maintained by the organizers and recipients of the campaigns for at least three years. If you have questions or concerns about a crowdfunding initiative that could impact your tax situation, reach out to your Windham Brannon advisor, or contact Tomika Bullet.

[1] Stevanovic, Ivan. “40+ Crucial Crowdfunding Stats in 2022.” March 17, 2022.