Tax Complications from Crowdfunding

Startups that utilize crowdfunding platforms such as Kickstarter or Indiegogo might ask themselves what the tax implications of receiving donations are (or at least they should be asking themselves that question!). Crowdfunding sites themselves tell users that donations should generally be considered income, but also encourage campaigners to get more specific tax advice from a tax attorney or accountant. However, some campaigners would counter that donations are simply tax-free communal gifts, and therefore shouldn’t be included in income. The IRS has yet to publish an official opinion (it will likely refrain from doing so until there is some sort of tax case before the courts). Although crowdfunding sites tell campaigners that donations are likely taxable income, that of course fails to take into account the various details and nuances each campaigner brings to the table — some campaigners are non-profits, and some aren’t even operating under a business entity. Other issues arise in the details of the campaign itself — are rewards being offered for donations, and if so what kind of rewards are they? Many campaigns are effectively advance sales of the campaigner’s products, which might also lead to the necessity of sales tax (which crowdfunding platforms do not collect, but which campaigners may still be responsible for). Before getting into a crowdfunding campaign, entrepreneurs should consult with a tax advisor to discuss the details of their particular company or venture and the details of the campaign they intend to run to determine what taxes, if any, the campaigner will need to pay on the donations it will receive. Utlimately, one startup will be brave or bold enough to bring a test case before the IRS and finally obtain a concrete ruling on the taxability of crowdfunding donations.

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