Since the beginning of time people have, at one time or another, relied on the kindness of others for assistance. From contributions made through a church or non-profit organization, to helping a neighbor in need, people have always been helping people.
Over the past decade social media has grown into a powerful tool for people and their philanthropic works. Crowdfunding efforts through social media (through sites such as www.gofundme.com, www.kickstarter.com, www.indiegogo.com, etc. ) has become an efficient method for spreading awareness around a specific issue facing particular individuals and groups, or even yourself, as well as to raise money for startup businesses and projects. Most recently, we have seen many crowdfunding efforts to assist Vermonters who were affected by this summer’s flooding. Even with grants and assistance being provided by various federal and state agencies, as well as local non-profit organizations, it is often not enough to help all businesses and families get back on their feet. As a result, there’s been an uptick in the use of crowdfunding sites for people to get the help they so desperately need.
But what are the tax implications of receiving money through crowdfunding sites?
First, contributions are generally considered gifts and are not taxable. This is the case as long as the contributions are being made without the expectation that the donor will receive something in return. This applies to those who have set up crowdfunding campaigns for themselves or someone they know.
We recommend that if you launch a crowdfunding campaign for yourself or someone else you should keep a record of all transactions associated with the funds, in the event you are audited. If that were to happen, you will want to be able to demonstrate the following to the taxing agency:
- Who contributed the funds,
- How much was collected,
- Who received the funds,
- And how exactly the funds were used.
On the other hand, if you are the contributor, you should keep records of the donation as well because depending on your situation you could potentially qualify for a deduction on your tax return.
Now, where things might get complicated is if you are at the receiving end of the crowdfunding efforts and a 1099-K is issued to you by the crowdfunding site. A 1099-K is issued for income generated from payment card and third-party network transactions, which contributions from a crowdfunding site would fall under. 1099-K’s will be issued if the amount raised is more than *$600 and contributors receive either goods or services for their contributions. These sites do not usually issue a 1099-K for every campaign, as they can’t be certain that goods or services were not exchanged, even if a campaign states as much. But there is no need for concern! If you receive a 1099-K it does not necessarily mean that money is taxable for you. At that point we recommend that you contact a tax professional to discuss what is best for your specific situation. Click here for more information from the IRS about 1099-Ks.
With offices in Williston and Rutland Vermont, Davis & Hodgdon CPAs has been assisting Vermont’s residents and entrepreneurs for more than 30 years. Our proactive approach makes us more than an accounting firm – we counsel our clients on a wide range of financial issues, resulting in better decision making and more confidence in their success. Click here to contact us today and find out how we can help you!
Recipients should not act on the information presented without seeking prior professional advice. Check with your tax advisor about your specific situation or click here to reach out to one of Davis & Hodgdon’s tax experts.
*Threshold as of September 2023.
Written by Michael Hamilton, Associate Accountant II, Davis & Hodgdon CPAs