Understanding the tax deductibility of crowdfunding donations

Understanding the tax deductibility of crowdfunding donations

On Behalf of | Mar 9, 2023 | Charitable Giving, Tax Planning

Crowdfunding has helped many people in New York raise money online. This money can be used for charities, businesses, and as gifts. Many are surprised to learn that money raised through crowdfunding might be taxable.

When is crowdfunding money considered a gift?

The IRS considers all income raised from any source to be part of a person’s gross income. The exception is money excluded by law. Often, a gift is not considered gross income for the recipient.

If a person organizes crowdfunding to raise money to help someone else, the money is likely not considered part of the organizer’s gross income. Of course, this hinges on the fact that the person who raised the money gives it to the person they raised it for.

When people donate to crowdfunding campaigns as a sign of generosity without expecting compensation, the donation is a gift. It is not considered income for the person who organized the campaign.

One exception to this is if an employer contributes to employees’ crowdfunding campaigns. Contributions from an employer are typically seen as part of the employee’s gross income. Similar to trusts, charitable giving, and tax planning, there are unique taxation rules that apply to contributing to crowdfunding campaigns. Donors and recipients must familiarize themselves with these rules to ensure their tax filing and deductions align with current IRS guidelines.

Crowdfunding and form 1099K

The website or payment processor for the crowdfunded donations will need to file form 1099K with the Internal Revenue Service. This must be done anytime the funds are more than $600 raised or individuals who contribute to the crowdfunding receive goods or services for the money they contributed.

The amount shown on the 1099K form is not automatically taxable. However, suppose the distributions shown on the form are not included in the taxpayer’s return. In that case, the IRS may investigate, and the recipient may need to explain why they failed to report the crowdfunding distributions.

Crowdfunding campaigns are a great way to help others and show generosity. Anyone donating to or receiving money from crowdfunding should protect themselves by keeping meticulous records and be ready to show these records for at least three years.