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.

Rewards-Based Crowdfunding

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

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.

Donation Crowdfunding

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.

Start-up Expenses

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.

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