What Are the Legal Ramifications of Crowdfunding Taxes?
It used to be that, when you needed money, your only options were to ask family members or go the traditional bank loan route. As with many things today, we’ve modernized funding so that we can pretty much do it on our own, and without having to pay it back, too!
That phenomenon is called crowdfunding, and it’s a revolutionary way to raise money for everything from new businesses, helping out a friend in need, and even making movies! It’s no secret that crowdfunding helps people get things done without burdening them with debt, but that doesn’t mean it’s a financial windfall.
In many instances, the money you receive from crowdfunding sources is considered taxable income by Uncle Sam. Not on the up and up with crowdfunding taxes? Read on to learn all about it.
What Exactly Is Crowdfunding?
Crowdfunding is a way of raising money for things like businesses or products from a wide number of people. Traditional fundraising is usually done through one or a few people, meaning you have to get a large amount of money from each person in order to get your project off the ground. Crowdfunding is advantageous because it is open to a limitless number of people, so, in theory, you can raise the same amount of money without placing a huge financial burden on your donors.
Are There Different Types of Crowdfunding?
Yes! There are three different types of crowdfunding available: donation-based, reward-based, and equity-based.
Donation-based crowdfunding is when you or someone else set up something like a GoFundMe for projects, events, or a friend or loved one who needs money for things like medical expenses, last minute airfare to visit a sick loved one, and many other things. In donation-based crowdfunding, the person who sets up the crowdfunding project is an agent, and the person it helps is the beneficiary.
Reward-based and equity-based funding work in similar ways. Reward-based campaigns offer donors different types of rewards based upon the size of their donations. Equity-based campaigns offer donors equity in their product or business in exchange for their donations.
How Does Crowdfunding Taxation Work?
Curious if the money you raise from your crowdfunding campaign is taxable? As with all things legal, the answer is: it depends.
Donation-based crowdfunding can be complicated. Donations from a crowdfunding campaign are taxable, but the taxes must be paid by the beneficiary of the campaign, not the agent.
There is a loophole, however, for smaller campaigns. The government permits this income to be considered a gift for tax purposes. This means that you will not pay taxes on the first $15,000 you receive, but you will have to pay taxes above and beyond that.
Reward-based campaigns are also taxable. The rewards you offer for donations are considered a taxable sale by the government because you offered something in exchange for payment. This means it is subject to sales and uses tax.
All the money you raise in a reward-based campaign is taxable income and needs to be reported.
Equity-based campaigns are not considered income by the government. This is because the money donated gave the donors an equity interest in your business.
Having Issues with Crowdfunding Taxes?
Crowdfunding is a great way to make sure that your business gets the money it needs to get on its feet. It’s also a great way to help out friends and loved ones when they have financial emergencies. That said, if the proceeds from your campaign are subject to crowdfunding taxes, remember to set aside a portion for Uncle Sam.
Were you hit with a surprise crowdfunding tax bill from the IRS? Don’t panic. Contact us today to learn how we can help you!