Crowdfunding tax consequences for organizers and recipients
Friday, August 30, 2024
Crowdfunding, a personal way of raising money that’s been supercharged by social media’s reach, has tax implications.
Most of us are familiar with charitable crowdfunding. Expect to see a lot more of that in the wake of natural disasters, with solicitations by individuals and groups looking for help for themselves or others.
In addition to charitable fundraising, there also are lots of online financial solicitations by and for businesses.
Regardless of the crowdfunding reason, the Internal Revenue Service notes that distribution of the funds may be includible in the gross income of the person receiving the money.
Of course, the taxability depends on the always popular IRS qualifier of facts and circumstances.
The IRS also reminds crowdfunding websites or their payment processors that they may be required to report distributions of money raised if the amount distributed meets certain reporting thresholds.
Below, courtesy Uncle Sam’s tax collector, is a closer look at these potential crowdfunding tax situations and obligations.
Tax treatment of money raised and distributed: Federal tax law mandates that gross income include all income from whatever source derived unless it is specifically excluded from gross income by law.
So, what does this mean to the person or group receiving crowdfunded money? As tax savvy readers know, there are lots of crowdfunding tax potential.
If the funds are determined to be gifts, then they are in the tax clear. In most cases, property received as a gift is not includible in the gross income of the person receiving the gift.
That’s generally the case where crowdfunding contributions are made as a result of the contributors' detached and disinterested generosity, and without the contributors receiving or expecting to receive anything in return. In these circumstances, the crowdfunded amounts may be gifts and therefore may not be includible in the gross income of those for whom the campaign was organized.
But in some cases, notes the IRS, contributions to crowdfunding campaigns are not necessarily a result of detached and disinterested generosity, and therefore may not be gifts.
Additionally, contributions to crowdfunding campaigns by an employer to, or for the benefit of, an employee are generally includible in the employee's gross income.
And if a crowdfunding organizer solicits contributions on behalf of others, distributions of the money raised to the organizer may not be includible in the organizer's gross income if the organizer further distributes the money raised to those for whom the crowdfunding campaign was organized.
As you can see, a smart move for anyone involved in a crowdfunding campaign is to consult a trusted tax professional for information and advice on their effort’s particular facts and circumstances.
Form 1099-K for crowdfunding distributions: Another reason to talk to a tax pro is to clarify whether your crowdfunding website or its payment processor must report distributions of the money raised. This is done, if the amount distributed meets certain reporting thresholds, by filing Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS.
If required to file a Form 1099-K with the IRS, the crowdfunding website or its payment processor must also furnish a copy of that form to the person to whom the distributions are made.
The American Rescue Plan Act (ARPA) clarifies that the crowdfunding website or its payment processor is not required to file Form 1099-K with the IRS or furnish it to the person to whom the distributions are made if the payments are not made in exchange for goods or services.
The reporting thresholds for a crowdfunding website or payment processor to file and furnish Form 1099-K are different for calendar years 2023 (and earlier) and 2024.
For 2023 and prior years, Form 1099-K is required if the total of all payments distributed to a person exceeded $20,000 and resulted from more than 200 transactions.
For 2024, the IRS announced a plan for the threshold to be reduced to $5,000 as a phase-in for the lower threshold provided under the ARPA.
The IRS also notes that ARPA lowered the reporting threshold for third-party settlement organizations (TPSOs) so that these entities are only required to report on Forms 1099-K if the total of all payments distributed to a payee in a calendar year exceeds $600, regardless of the number of transactions. However, implementation of this lower threshold has been delayed.
Tips for 1099-K recipients: Crowdfunding distributions may be made to the crowdfunding organizer, or directly to individuals or businesses for whom the organizer solicited funds.
Sometimes, a person receiving the Form 1099-K detailing the distributions may not recognize the filer's name on the form. That could be the case where the payment processor used by the crowdfunding website, rather than the crowdfunding website itself, furnishes the Form 1099-K and therefore is listed as the filer on the form.
If the recipient of a Form 1099-K does not recognize the filer's name or the amounts included on the Form 1099-K, you can call the filer's telephone number listed on the form to clarify why you got this tax statement.
1099-K entry details: As for the 1099-K form itself, shown below, here’s a look at where you’ll find key entries and what they might mean for your personal tax filing.
Box 1 on the form will show the gross amount of the distributions made to a person during the calendar year. But the furnishing of a Form 1099-K doesn't automatically mean the amount reported on the form is taxable to the person receiving the form.
If non-taxable distributions are reported on Form 1099-K, the recipient should report the transaction on Form 1040, Schedule 1, as follows:
- Part I – Line 8z, Other Income – “Form 1099-K Received for Non-Taxable Crowdfunding Distributions” to show the gross proceeds from the distributions reported on Form 1099-K.
- Part II – Line 24z, Other Adjustments – “Form 1099-K Received for Non-Taxable Crowdfunding Distributions” to show the non-taxable amount of the distributions reported on Form 1099-K.
The net effect of these two adjustments on income is $0.
Alternatively, if non-taxable distributions are reported on Form 1099-K and the recipient does not report the transaction on their tax return, the IRS may contact the recipient for more information.
The recipient will have the opportunity to explain why the crowdfunding distributions were not reported on their tax return. As noted earlier, the income tax consequences depend on all the facts and circumstances.
You can find more information on tax obligations of a Form 1099-K recipient at IRS.gov’s Understanding your Form 1099-K page. Note especially the link IRS.gov/1099khelp.
And, as noted earlier but always worth a repeat, a good tax professional can help ensure you property report any taxable amount shown on your form 1099-K.
Tax Felon Friday: Much crowdfunding is well-intentioned and, when it comes to helping those in need, does a lot of good, such as helping those disaster victims mentioned earlier in this post.
But that’s much, not all. Too often — and just one instance is one too many — crooks use crowdfunding to take advantage of people’s inclination to help others.
So don’t automatically give to a purported crowdfunding effort. Check it out to make sure it is legitimate. If there’s any doubt, find another, IRS-approved charitable group that will accomplish the same goal.
As long-time readers of the ol’ blog know, my unofficial title is Chief Disaster Tax Geek. I’ve earned that sobriquet from my years of blogging about taxes and disasters and things related to them, like scammy charities created after storms pass.
That’s why I’m taking the opportunity in this post to remind folks don't fall for disaster charity scams, crowdfunded or other types.
When crooks do run catastrophe-related cons and are caught, I’ll add the consequences of their criminality to the tax crimes list.
In the meantime, if you want to catch up on all sorts of tax miscreants, the ol' blogs' special Tax Felon Friday page is a good place to start.
And if you want more tax crime posts, notably those that were published long before I gave them a special end-of-week feature, you can peruse, what else, the tax crimes category. You'll find this post at the top of that collection right now, so just scroll down for more.
You also might find these items of interest:
- A dozen disaster scam warnings
- 6 ways to avoid tragedy-related crowdfunding scams
- Don't fall for Form 1099-K myths this tax filing season
- Cancer survivor gets $19,000 tax bill for GoFundMe donations
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Very good article that explains a number of tax issues surrounding crowdfunding!
Posted by: Elmer Stoup | Monday, September 02, 2024 at 10:24 PM