As you begin your endeavor, there are several ways to pursue funding. One of the ways to gain funding for your endeavor is crowdfunding.
Crowdfunding is “a method of raising capital through the collective effort of friends, family, customers and individual investors” (source).
Crowdfunding generally uses the method of online platforms (social media for instance), to engage a large group of individuals and increase exposure.
In the search for increased reach and exposure, crowdfunding has even attracted our friends at the IRS. Recently, they explained the tax treatment of crowdfunding, especially as it relates to income inclusion.
Code Sec. 61(a) defines gross income as all income from whatever source derived. Obviously, there are some exceptions (shocking no?), but for the most part, all the income you earn is part of taxable income, regardless of where it’s derived, unless it is specifically excluded.
So why does the IRS care?
Based on the above reference, they have concluded that crowdfunding payments are taxable income unless one of these exceptions are met:
- Loans with a repayment obligation
- Capital contributed to your organization in exchange for some portion of your company (equity interest)
Crowdsourcing is a fairly new concept in the tax world so there is no case law at this time. It will be exciting to see how the tax courts react to this down the road. (Yes, I’m a tax nerd and think this stuff is exciting.)
When do I have to pay tax on crowdsourcing receipts?
If the crowdfunding payments do not meet one of the exceptions listed above, they are probably taxable in the year the payments hit your account.
Which brings us to another term you’re excited to learn: constructive receipt. This basically means that income is taxable in the year funds have been credited toward your account and made available for you to draw on in the future, even if they have not physically received those funds.
The moral of the story?
There are tax ramifications for just about everything you do in business. So it’s important to be mindful of your finances, and what you’re reporting.
Still confused or need more help? We’re here.