If you’re launching a business and looking to raise funds through crowdfunding by using a site like Kickstarter, you may have to pay taxes on that money. How will you know if the money you receive through crowdfunding is taxable?
The IRS just released a fact sheet detailing the new results pertaining to crowdfunding. In short, if the person receiving money through crowdfunding receives a 1099-K form from the platform or the payment processor for the platform, they must pay taxes on it. However, certain situations determine when you would receive a 1099-K form for crowdfunding income received. Let’s review.
When Is Crowdfunded Money Not Taxable?
First, understand that if the contributors to the crowdfunding campaign do not receive goods or services in exchange for their contributions, the money is not taxable. So, if you set up a GoFundMe to help your cousin who is going through cancer treatments, and you don’t give the donors anything in exchange for their gift, no one will receive a 1099-K or have to pay taxes on the funds.
Any donations made through PayPal or Venmo should always be processed as “friends and family” transactions to avoid accidental tax ramifications.
Similarly, if someone donates a gift to you, a family member or your business — with no expectation of receiving anything in return and you do not send them anything in return — the money is considered a gift, the IRS states. Again, gifts sent through payment platforms should always be processed as “friends and family.”
When Is Crowdfunded Money Taxable?
If you are running a crowdfunding campaign, for instance, to launch a new board game and you give each contributor a game once it is released, you will receive a 1099 from the platform or their payment processor and will have to pay taxes on the income. However, this is only true if you receive more than $600 in payments.
Previously, you would only have to pay taxes on income through crowdfunding or payment platforms for business transactions totaling $20,000 or more in gross payments across 200 or more transactions.
Money documented on a 1099-K form would be added to your gross income for the year and would factor into the total amount of taxes you owe, according to the IRS Fact Sheet.
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