According to crowdexpert.com, an estimated $34 billion was raised by crowdfunding in 2015. This number is expected to have increased in 2016. Crowdfunding is a way to raise money from a large group of people and is most often done online. Common crowdfunding websites such as Kickstarter or GoFundMe allow for people all around the world to donate to a cause. Crowdfunding can be used to raise money for a variety of things, large or small, such as treatment for a sick child in a small community, or to start a global business. For each crowdfunding venture, there are two parties; the creator/donee and the investor/donor. There are tax issues that each party needs to think about when participating in crowdfunding.
There are four main types of crowdfunding that differ by what investors get in return for their contribution.
- Donation-based – The investor gets nothing in return for the contribution.
- The donee has no tax consequences and the contribution is not revenue.
- The investor cannot deduct the contribution unless it is to a qualified organization.
- Rewards-based – The investor receives a product or service in exchange for the contribution.
- If the reward is of de minimis value, the contribution is not treated as income.
- If the reward has a greater than de minimis value, the donee may have to recognize income on the value of the reward. For example, if someone was crowdfunding to start a jewelry business and stated that each investor who donates more than $500 will receive $100 worth of jewelry, the donee would recognize $100 of income.
- Equity-funding – Investors get an equity interest in the business in return for their contribution.
- The investor may have to recognize a portion of the business’s income.
- Loan-based – The investor’s contribution is treated as a loan and the expectation is that the investor will be paid back.
- The investor may have interest income.
- The donee may be able to deduct the loan interest.
With crowdfunding continuing to grow and being used to start businesses, those involved need to be aware of potential tax issues. Investors need to think about if their contribution is deductible or if the contribution may lead to income. Donees need to consider if the contribution is income to them. Please contact us if you have any questions related to crowdfunding.