Is crowdfunding taxable? Your generosity and the IRS

Your Guide to State, Local, Federal, Estate + International Taxation

As the internet has grown, it has helped take crowdfunding from a novelty to an industry in which billions of dollars change hands each year. Companies like Kickstarter and GoFundMe have helped the industry grow to the point that it now rivals venture capital and angel investments as a source of financing. Celebrities like Spike Lee and Zach Braff have set up campaigns to finance films through crowdfunding and charitable campaigns have been used for everything from helping the survivors of tragedies to allowing Olympians to follow their dreams. But as the industry grows and fundraising efforts become more prominent, what are the tax consequences of all that money coming in?

crowdfunding, computer, taxesCrowdfunding is not mentioned anywhere in the Internal Revenue Code. At this point there have been no IRS cases or rulings dealing with it directly, but earlier this year the IRS did issue an information letter and essentially it points to some general tax principles that need to be applied.

In general, gross income includes all income from any source unless that income is specifically excludable. That includes crowdfunding and means that it will typically be taxable with a few exceptions: if it actually represents a loan that must be repaid, if it is in exchange for equity in the entity or if it is a gift made out of generosity.

If crowdfunding is generally included in income, then the next determination to be made is when it becomes taxable. The constructive receipt doctrine helps answer this question by providing that income is considered received once it is made available, regardless of whether it actually changes possession. If the income is subject to substantial restrictions or limitations, then it is not considered received, but the limitations cannot be self-imposed in an effort to delay income recognition.

As is often the case in new and emerging industries, it will take time for the IRS to issue direct guidance or litigate cases that can be used as examples, but they have already taken the first step in establishing that, in general, crowdfunding is taxable.

Michael Anderson, CPA