Background to Donation-Based Crowdfunding
You’ve seen it on Facebook countless times. A tragedy occurs to a friend of a friend, and your (first level) friend sets up a GoFundMe page to raise money for the poor unfortunate souls. An old friend approached me not too long ago. Her brother needed an organ transplant, but because he majored in circus at Florida State (no joke…well, a circus major is, itself, a joke), her brother had no insurance. Her other brother (from the same mother) started a GoFundMe page to raise the $50k needed for the surgery.
My friend, we’ll call her Matie, has somewhat of a worrywart of a father, and he did what every armchair lawyer would do. He Googled the tax consequences of crowdfunding. As he read through the numerous message boards, he came upon something that concerned him greatly. If a crowdsourcing campaign raises over $20k or has more than 200 transactions during the calendar year, the host/payer (e.g., GoFundMe) must issue the payee (generally the creator of the campaign) a form 1099-K (Payment Card and Third-Party Network Transactions).
Matie’s father was apoplectic. What effect was this going to have on the son with the healthy organs? He called Matie, his voice quavering, and explained what he had “learned” on the interwebs. Luckily, Matie was familiar with Briefly Taxing and knew that I was a tax attorney. She reached out, and we chatted for the first time since college. It was lovely to reconnect, and I was happy to help.
What is Crowdfunding?
Crowdfunding is simply the activity or process of raising money from the masses. The endeavor operates on volume rather than value—many people donate modest amounts, which can quickly add up. There are three main types of crowdfunding.
First, there is reward-based crowdfunding, where the backers receive a tangible good or services in return for their payment. Next, there is equity crowdfunding, which is exactly what the name implies. The backers of the project receive equity-based in return for their payment. Finally, and the one that we are most concerned about in this article, is donation-based crowdfunding. With donation-based crowdfunding, the backers receive nothing but the satisfaction of knowing that they helped a good cause.
Taxing Donation-Based Crowdfunding
There is not a whole heck of a lot of guidance in this area. Neither the IRS, nor the crowdfunding websites themselves offer much guidance whatsoever. The IRS issued an Information letter in 2016 (Information Letter 20160036); however, it talks mostly about equity-based and reward-based crowdfunding. Thus, we must look to general principals of the tax laws to determine if and how donation-based crowdfunding is taxed.
Income is income from whatever source, unless it’s not. One of the exceptions to this broadly inclusive rule is that property received as a gift will not be considered income to the donee by the donor. A gift is given without expectation of receiving anything in return, whether property or services. It is given out of the goodness of your heart and out of affection, respect, admiration, charity, or “like impulses.”
So, donation-based crowdfunding, for which nothing is expected in return for the backing of the cause (and in which nothing is in fact given in return), and which is made out of affection, respect, admiration, charity, or “like impulses,” will likely qualify for non-inclusion of income. GoFundMe even has a form for an agent of the beneficiary who sets up a campaign to benefit another person, so that if the IRS comes a-knocking, which they have been known to do, the agent should be able to easily prove the donative intent of the campaign.
Reporting Crowdfunding Campaigns
As I mentioned above, payers like Kickstarter and Indiegogo are required to send a Form 1099-K to a payee, who receives more than $20,000 and has more than 200 transactions during a calendar year. A copy of this form will also be sent to the IRS. This is what Matie’s father was so worked up about. However, if you dig a little deeper, you’ll find that the reporting requirement does not apply to donation-based crowdfunding.
Transactions that are paid by credit or debit card and those settled through a third-party payment network must be reported. Third-party payment networks, however, only provide arrangements and mechanisms to settle transactions payment to those providing goods or services. The Treasury Regulations further emphasize that a Form 1099-K should only be given to an agent under the reward-based or equity-based models.
I told Matie the same, and put it in an email that she forwarded to her dad, reducing his heartrate to something below that of a field mouse.
- Pursuant to IRC § 6050W. ↑
- IRC § 61. ↑
- Duberstein v. Commissioner, 363 U.S. 278, 285 (1960). ↑
- Id. ↑
- IRC § 6050W. ↑
- IRC § 6050W(d)(3); Treas. Reg. § 1.6050W-1(c)(3). ↑
- 310 beats per minute on the low end. ↑