Crowdfunding started as a way for entrepreneurs to fund new enterprises. Then charities started getting in on the act through platforms like GoFundMe and Kickstarter. This has resulted in grassroots appeals for worthy causes around the country.
But what are the tax implications? It depends on whether you’re giving or receiving charitable donations.
Giving charitable donations
Typically, a crowdfunding effort will be devoted to helping a specific individual or a class of individuals. For instance, you may be raising money to provide assistance to a seriously ill person or a group of children in need. In these cases, your generosity is appreciated, but the tax benefits are nonexistent.
To be deductible as a charitable contribution, the donation must be made to a qualified charitable organization to benefit a broad base (you can find a list of qualified organizations on the IRS website). It can’t be just for one person. And even when crowdfunding payments qualify for a deduction, other restrictions may apply.
Finally, your contribution may be treated as a taxable gift, although amounts up to $15,000 can be sheltered by the annual gift tax exclusion.
Receiving charitable donations
The tax aspects are even more complicated for recipients. Assuming that the transfer doesn’t qualify as a deductible charitable contribution, it’ll generally be considered as taxable income to the recipient, unless it is deemed to be a gift.
Another issue is who is the recipient of the money — the organizer or the ultimate beneficiary? Previously, the IRS has indicated that the beneficiary is the recipient if the organizer is merely acting an agent. This is important when determining tax obligations.
The optimal approach may be to treat the transfer as a gift that qualifies for the gift tax exclusion and isn’t taxable to the recipient. In this case it might make sense to file a gift tax return, even if one isn’t required.
The law is still evolving, so call us if you have questions about your situation.
