Crowdfunding and Taxes

Disclaimer: The following is not, nor should be interpreted as, legal or tax counsel. If you have any questions or concerns about your tax liabilities or status, please seek professional assistance.

Benjamin Franklin is famously quoted as saying that only two things are certain: death imagesand taxes. Unsurprisingly, as the crowdfunding industry evolves and proliferates, tax concerns are close behind. Recently, a number of excellent articles have broached the subject. Still, it’s an inherently tricky issue for at least two reasons: first, the rules themselves are still unclear. Second, organizations that do not hold a tax advisor’s license are discouraged or even prohibited from offering tax guidance.

In this post we’ll summarize some of the issues surrounding taxation and crowdfunding. Again, please consult a licensed tax professional if you have any questions on your taxable or legal status.

Classifying Funds

The most pressing issue facing crowdfunders is the question of how to treat the funds they raise through their projects. Dailycrowdsource.org offers a great primer on the different ways that crowdfunding dollars might taxed by the IRS. According to the article, there are four main categories: equity, sales, income, or gifts. Pending final regulations from the SEC, equity is still most certainly on hold, so you’re wise not do anything that could be considered an equity raise! However, understanding which of the final three categories best fits your case is slightly more difficult.

Most crowdfunders would probably prefer to have their funds classified as gifts. As Daily Crowdsource explains, under sections 118 and 102 of IRS code, gifts are not considered income, and thus may be subject to less taxation. Still, in any scenario where a perk, prize or reward is being offered in exchange, funds raised may not be classifiable as gifts at all. In Commissioner v. Duberstein 363 U.S. 278, 285 (1960), the US Supreme Court ruled on the nature of gifts, and by these definitions, some if not most crowdfunding activity does not meet the criteria.

That leaves income and sales tax. According to Daily Crowdsource, sales tax may be owed in cases where crowdfunding serves as a pre-sale. Income taxation could also be applicable. Recently, IRS representative Bruce Friedland stated that, “In general…money received without an offsetting liability, that is not a capital contribution or a gift, is includible income.”

Expect a Test Case

Perhaps the confusion is to be expected. According to a piece by International Business Times, the IRS has yet to hand down any conclusive ruling about whether crowdfunding projects are gifts, income, or something else altogether.

TaxMama.com publisher Eva Rosenberg is expecting a court challenge in the near future. “Somebody who’s really aggressive with a tax professional with a sense of humor is going to test the case,” she says. Until then, there may not be absolute clarity.

In the meanwhile, attempts to give guidance may be fraught with problems. This April, Kickstarter released its tax guide. While some have praised it as conservative and useful, others are not so sure. Cameron Kent, a tax lawyer, criticized the guide for making the assumption that crowdfunding campaigns automatically qualify as businesses under tax law, a premise that may not prove true.

“The tax guide started with the best intentions, but the execution is beyond wrong,” he wrote for a Forbes.com blog post.

Clearly, there is still confusion in the industry, but it is our hope at Launcht that comprehensive tax guidelines come to the crowdfunding world in the near future. And again, while this post provides a cross-section of some of the current topics surrounding taxes and crowdfunding, we urge readers to take a conservative approach where all compliance issues are concerned, and always defer to professional guidance.

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