The Everything Guide to Crowdfunding Taxes

Your crowdfunding campaign asks backers for contributions. And whenever money changes hands, Uncle Sam wants his cut. This begs the question – are you required to pay taxes on crowdfunding? 

According to the IRS, crowdfunding donations are taxable income if donors receive something in exchange for their donation, such as a service or product. If you’re crowdfunding for a personal cause, though – like helping a friend in need – this income isn’t subject to taxes.

It’s important for crowdfunding campaigns to understand the taxes they owe. Doing so provides a full picture of operating costs and remaining operating capital. This is why accounting for crowdfunding taxes is a key step in planning a successful crowdfunding campaign.

This is a guest post from Easyship, the leading shipping platform for crowdfunding campaigns. Easyship integrates with both Indiegogo and Kickstarter to help you estimate your crowdfunding shipping costs and save up to 70% with direct access to leading shipping companies around the world. 

Use this article to learn about the different types of crowdfunding taxes, how to calculate these taxes, and prepare your crowdfunding campaign for success.

 

Paying Federal and State Crowdfunding Taxes

Crowdfunding proceeds are taxable income. This means you must report proceeds as taxes the year they’re received, or become constructively available to you. In addition to federal taxes, you may have to pay state income tax or sales tax.

Here’s everything you need to know about crowdfunding taxes.

Kickstarter and Crowdfunding Taxes

Kickstarter says that any amounts raised on its platform in the US are automatically considered as income, meaning they are subject to crowdfunding taxes.

 

Indiegogo and Crowdfunding Taxes

Indiegogo says that you will incur crowdfunding taxes if you raise more than $20,000 or get more than 200 backers.

 

Crowdfunding Taxes For Your State

Crowdfunding proceeds incur state sales and income tax, if applicable. You’ll need to remit these taxes – or pay them periodically throughout the year – depending on your state’s requirement. 

Visit your state’s revenue office website to determine the filing period, or how often you must remit the state sales tax. Most states require you to pay monthly, quarterly, or yearly.

Use the sales tax remittance form on the state revenue site to submit your payment. You may incur late fees if these payments aren’t received on time.

 

How to File Crowdfunding Taxes

Crowdfunding taxes are due as specified by the federal government and your operating state. In the US, this means you must pay taxes for the previous calendar year no later than April 15th of the following year. 

Campaigns over a certain threshold will receive a Form 1099-K from their crowdfunding platform. This form summarizes your taxable income and reflects your total contributions. This makes it a handy reference for determining what you owe in federal taxes. The crowdfunding platform also sends a copy of your 1099-K to the internal revenue service (IRS). 

Not every crowdfunding campaign will receive a Form 1099-K. You’ll only receive a Form 1099-K if you both:

• Raised over $20,000 in a calendar year
• Received over 2000 contributions in a calendar year

Again, you’ll only receive a Form 1099-K if you received both 200+ contributions and if the total contributions amounted to more than $20,000. 

Didn’t meet these thresholds? 

You won’t receive a Form 1099-K, meaning you’ll need to calculate your federal taxes by yourself. To do this, refer to your payments processing application for records of all taxable contributions from the previous year. Meanwhile, if you owe state income taxes or sales tax, you’ll need to refer to your records of contributions.

 

3 Crowdfunding Models and The Tax Implications

A few crowdfunding models exist, but only one incurs crowdfunding taxes.

 

Rewards-Based Crowdfunding

A form of crowdfunding where investors back a campaign in return for some kind of benefit, usually the product or service sold by the campaign. Most crowdfunding campaigns fall into this category. The taxable value of the product or service is equal to the amount of money pledged. In other words, the taxable income from an individual backer is, generally, the amount of a single contribution. 

If your campaign exceeds the 200 donations + $20K threshold, you’ll need to file a Form 1099-K. Your crowdfunding platform should send this form to you (and a corresponding form to the IRS). Check your payment processing app for full records of taxable contributions.

 

Equity Crowdfunding

When investors invest in a new, privately-held venture in exchange for equity (shares) in the business and a corresponding cut of profits.

Equity crowdfunding is typically exempt from crowdfunding taxes. However, you, as a campaign creator, must pay capital gains tax on any profits from selling products or services.

 

Donation Crowdfunding

Donations are made to a good cause, usually to a charity or non-profit. Since nothing is exchanged, these donations are considered gifts, not taxable income. This means donation crowdfunding doesn’t incur crowdfunding taxes.

 

Deductions on Crowdfunding Taxes

Crowdfunding campaigns are considered a business, meaning you can deduct operating expenses from profits before paying taxes. Make sure to keep all your receipts for business-related purchases in case the IRS comes calling.

Make sure to familiarize yourself with the typical business deductions. Additionally, you can get a tax break on the following expenses:

• Research & development: This includes anything you spend money on to develop or improve your product. For example, any costs related to filing a patent, making models, or fabricating your invention are a write-off.

 

• Start-up expenses: This includes market surveys, advertising your campaign kick-off, legal services, employee training, and other professional services before you open the campaign. Most expenses paid before the first day of your campaign launch are considered start-up expenses, up to $5,000 in the first year.

Crowdfunding Taxes 101

For-profit crowdfunding campaigns are subject to federal taxes, and state taxes where applicable. You’ll want to keep records of all your expenses to claim deductions. If you’ve raised upwards of $20,000 and received over 200 donations, be on the lookout for a Form 1099-K. Otherwise, you’ll file taxes using the records of your third-party payments processor. 

For help estimating your crowdfunding campaign shipping costs, try this free campaign cost calculator from Easyship.