Crowdfunding Taxes - Regulations and Startup Funding
Crowdfunding platforms such as Wefunder, StartEngine, Republic, etc. have become increasingly popular for both business owners and individuals looking for funding for creative ventures or startup capital. The best thing about it is that it is generally possible to raise the capital you need relatively quickly but the drawback is that this money is considered taxable income. Read on to learn more.
Crowdfunding and Taxes
Crowdfunding proceeds are considered taxable income. This means you have to report proceeds as taxes the year they are received or become beneficially available to you. Apart from federal taxes, crowdfunding proceeds also incur state income tax and sales tax, if applicable. You must pay these taxes every now and then throughout the year – depending on the requirement of your state.
It is recommended that you visit the website of your state’s revenue office to determine the filing period, or how often you are required to remit the state sales tax. In most states, you can pay monthly, quarterly, or annually. You will need to use the sales tax remittance form provided on the website to submit your payment. If these payments aren’t received on time, you may incur late fees and charges.
Different Crowdfunding Models and Their Tax Implications
While there are several different crowdfunding models, crowdfunding taxes are only applied to one specific model. Read on for more details.
This is a type of crowdfunding where investors fund a campaign in return for some kind of benefit, generally the service/product sold by the campaign. Most crowdfunding campaigns fall into rewards-based crowdfunding. The taxable value of the service or product is equal to the amount of money pledged. In other words, the taxable income from one investor is, typically, the amount of one contribution.
Equity crowdfunding is when investors invest in a new private venture and get business equity as well as a corresponding cut of profits in return. Generally, there are no taxes when it comes to equity crowdfunding. However, campaign creators must pay capital gains tax on any profits they make from the sale of services/products.
Donations are made to a good cause, typically to a non-profit or charity. Since nothing is exchanged, donations are regarded as gifts, not taxable income. So, there are no taxes incurred.
Deductions on Crowdfunding Taxes
A crowdfunding campaign is regarded as a business, which means you can deduct operating costs from profits before you pay taxes. So, in case the IRS comes calling, it’s a good idea to keep all your receipts for business-related purchases. It is recommended that you familiarize yourself with the usual business deductions. You can also get a tax break from these expenses:
Research & Development
This includes anything you spend money on in order to improve or develop your product. For instance, any costs related to fabricating your invention, making models, or filing a patent are a write-off.
This includes employee training, legal services, advertising your campaign kick-off, market surveys, and other professional services before opening the campaign. Most expenses paid before the first day of the campaign launch are regarded as startup expenses.
The Bottom Line
Crowdfunding campaigns that are intended for profits are subject to federal taxes and in some cases, state taxes as well. If you are planning to use crowdfunding to raise capital for your startup or business or even for a personal cause, then it is highly recommended that you consult an accounting and tax professional first.
Crowdfunding and Income Taxes
Do you have to pay taxes on Crowdfunding?
Looking for capital to fund a creative endeavor or start a new business? You may want to consider crowdfunding platforms like Indiegogo, GoFundMe, Kickstarter, etc. Crowdfunding has significantly grown in popularity over the years as it is one of the best ways to raise capital for both individuals and businesses.
Before starting your crowdfunding campaign, you may be wondering about any downsides. The most common concern many have are the taxes associated with crowdfunding. Crowdfunding and income taxes is a hot topic and it’s not surprising why. The IRS considers crowdfunding money taxable income. But the details of this vary. In general, there are two key factors that determine whether or not you will have to pay taxes on crowdfunding:
• The intent of the campaign organizer (you).
• Whether you are offering any services/goods in exchange for your supporters’ contributions.
Intent and Exchange
If your intent is to raise capital in exchange for services and/or goods, then the IRS considers the raised capital as taxable business income. For instance, if you are an artist and you wish to raise capital to produce your new album and you say that you will provide a “free” copy of the album to your supporters for their contributions, the raised capital will then be considered taxable. On the other hand, if you offer your investors an ownership interest in your business in exchange for their contributions, this is considered a non-taxable donation to business funds.
Some crowdfunding platforms will issue a Form 1099-K to whom the funds raised were transferred. It is the platform’s or third-party processor’s responsibility to complete the form. Generally, if over $20,000 is involved and over 200 transactions were made within the entire year, then both the crowdfunding campaign organizer and the IRS receive a copy of the Form 1099-K.
If you are a crowdfunding campaign organizer and your intent is to raise capital to cover costs of medical expenses, life events, etc. and no one will receive any services and/or goods from you in exchange for their support, the income would be considered as a gift. So, you won’t have to worry about paying taxes on crowdfunding in this scenario as gifts are not considered income.
Since donations made to 501 (c)(3) organizations, qualified charitable organizations, are for the benefit of the general public and aren’t meant to benefit any specific organization or individuals, they are tax deductible to the taxpayer contributor. Funds raised via crowdfunding platforms are reserved for specific organizations or individuals and are not tax deductible.
Gifts are not taxable to the recipient. However, if the amount for the gift exceeds the annual $15,000 per contributor limit, then the contributor may be subject to filing a gift tax return.
Conclusion In conclusion, whether or not you have to pay taxes on crowdfunding varies depending on your specific scenario. Generally, donations to crowdfunding platforms are eligible for tax relief. It is recommended that you consult your tax advisor before starting a campaign. Depending on your specific scenario, you may be able to take advantage of crowdfunding tax relief or tax shelter crowdfunding.