Key Points:
- Crowdfunding allows any entrepreneur or small business to fund their venture through donations from backers that believe in their project
- You will likely be obliged to pay sales tax and income tax for your crowdfunding campaign; this is especially true if your campaign is based in the US
- In most cases, your campaign funds will be liable as income tax, and you’ll have to declare this and do the relevant paperwork
When you’re starting a business, you’ll always need an injection of capital to get your venture off the ground. But traditional funding routes aren’t always available to all entrepreneurs; that’s where crowdfunding comes in. But while you’re planning your campaign, you should take some time to consider your crowdfunding taxes.
While Easyship can’t organize your campaign taxes for you, we can help you find the right fulfillment solutions for your campaign. Our platform integrates with major sites like Indiegogo and Kickstarter, allows you to estimate shipping rates and taxes with our online calculators, and streamlines your shipping process with a selection of useful automation.
This article will help you get a 360-degree perspective on your campaign by looking at the implications of crowdfunding taxes, from what types of taxes you might be subject to, how it works on different platforms, and what paperwork you might need to deal with.
Table of Contents
The Different Types of Crowdfunding
Crowdfunding allows any entrepreneur or small business to fund their venture through donations from backers that believe in their project. But, there are different types of crowdfunding and it’s important to know how each one differs as they will have different implications for crowdfunding taxes.
1. Rewards-Based Crowdfunding
This is a form of crowdfunding where investors back a campaign in return for some kind of benefit. This is usually the service or product being sold by the campaign. Most of the time, the value of the product or service is equal to the amount of money pledged. But does this attract crowdfunding taxes?
Typically, rewards-based crowdfunding for eCommerce would use third-party payment methods such as PayPal. Should the campaign raise over $200,000 and have over 2000 transactions in a year, then they would have to fill out a 1099 K form.
2. Donation Crowdfunding
In this type of eCommerce crowdfunding, donations are made to the cause, which is usually a charity or non-profit. Here, nothing is offered in return for the donations. For donation crowdfunding, the pledges received are considered to be nontaxable gifts; they won’t attract crowdfunding taxes.
3. Equity Crowdfunding
Equity crowdfunding is a new type of fundraising. This is where investors invest their money in a new, privately-held venture. In return, they get shares - or equity - in the business and can expect a share of the profits.
In most cases, equity crowdfunding is exempted from crowdfunding taxes. However, the campaign creator will eventually have to pay capital gains tax if they make a profit from the sale of products or services.
The Tax Implications of Your Crowdfunding Funds
Before launching your campaign, you should have a full understanding of crowdfunding tax implications and how they can affect your business. In certain cases, your venture will benefit from crowdfunding tax relief, though this usually only applies to non-profit campaigns or those run by charity organizations.
The first thing to understand is that you will likely be obliged to pay sales tax and income tax for your crowdfunding campaign; this is especially true if your campaign is based in the US. You’ll need to report the proceeds of your crowdfunding campaign to the Internal Revenue Service (IRS); this will be treated as taxable income (unless your campaign attracts money in the form of charitable donations).
You may be fundraising to expand your product line or grow your business in certain cases. In this case, you may be liable for sales tax when you make sales or provide a service to clients.
To get tax relief and avoid double taxation, you should make sure to deduct your operational expenses from your profit before tax. This ensures that the income raised through crowdfunding is already taxed before you use it to manufacture your new products, so you won’t be taxed twice.
Is Crowdfunding Tax Deductible?
The Internal Revenue Service (IRS) checks up whenever there is an exchange of money to encourage tax compliance. The IRS will normally send you the 1099 K Form for your tax filing.
You might be wondering, “Is crowdfunding tax-deductible under this system?” Under the IRS guidelines, the proceeds of a crowdfunding campaign normally have to be taxed as income because the investors receive something in return, like shares or products. But, if the money was given as a charitable donation, then you would enjoy crowdfunding tax relief.
Here are a few other things you should know:
● Funds from campaigns are taxable income: Any crowdfunding proceeds that you receive towards the support of your business are treated as taxable income. This is because the contributors are receiving something in return, which could be product samples or shares.
● Deduct your expenses from income: The good news is that you will be able to offset some of your business expenses while filing your crowdfunding taxes. You should keep receipts for all your operational expenses so that you can claim this in your tax assessment.
● Enjoy special tax on research and product improvement: As your business grows and you begin investing in research and product development, you may be entitled to additional crowdfunding tax relief.
● Avoid crowdfunding late in the year: Here’s a good tip when it comes to managing your business’s money: avoid crowdfunding late in the year. That’s because if you receive funds towards the end of the fiscal year, you’ll be liable for income tax; if you haven’t had much other income, you might struggle with your tax bill, leaving you without the money you need to fund your business venture.
How Do Taxes Work on Kickstarter, Indiegogo, and GoFundMe?
You may be wondering, “Do I have to pay taxes on crowdfunding?” and how this differs between different crowdfunding platforms. We’ll break it down for you here.
Kickstarter and Crowdfunding Taxes
Kickstarter has become especially popular among investors in creative projects like films, video games, tech gadgets, and books. Generally, all the amounts raised through Kickstarter are eligible for taxation.
Several factors, however, would determine how much you should pay in the form of crowdfunding taxes. Kickstarter advises that any amounts raised through its platform in the US will automatically be considered as income and thus be subject to crowdfunding taxes.
Indiegogo and Crowdfunding Taxes
Indiegogo was launched with the sole aim of crowdfunding to support new eCommerce ventures. It’s also an excellent platform for video games, tech projects, and scientific ventures. Fundraising on Indiegogo will attract crowdfunding taxes if you raise more than $20,000 or get more than 200 backers.
GoFundMe and Tax Implications
Many people GoFundMe to raise funds for charitable or personal projects. Any donations made through campaigns on GoFundMe are normally treated as gifts and donations, so they don’t attract crowdfunding taxes. However, the donor needs to report any donations over $15,000.
How to File IRS Forms for Your Crowdfunding Campaign
As crowdfunding has become more popular, tax obligations have become more complicated. If you’re a campaign owner, you need to understand your obligations around crowdfunding taxes and how to file the necessary forms with the IRS.
What is the 1099 K Form?
Most small and medium-sized ventures do not think about tax obligations until the tax man comes calling. In most cases, this will be in the form of a 1099 K form. This is a summary of all sale transactions by a campaign creator and is mandatory for reporting crowdfunding taxes.
Generally, the form will be sent to you earlier in the year if your campaign has a US bank account and your campaign raised more than $20,000 and had more than 200 backers. You should fill out the form correctly and declare all monies received.
Working with a Crowdfunding Tax Advisor
Due to the complexity of certain crowdfunding campaigns, you may need to work with a tax advisor to properly understand your crowdfunding taxes. This is because there’s a lot of complexity to work through.
For example, while fundraising for charities would normally result in crowdfunding tax relief, the campaign creator may incur taxes if they sold t-shirts for the same charity. If you decide you need a tax advisor, it’s critical to choose one who understands the process and will help you fill out the relevant tax forms.
Stay on Top of Your Crowdfunding Taxes with These Top Tips
The point of running a crowdfunding campaign is to raise funds. This means that you will have to deal with crowdfunding taxes and obligations to the IRS. As you can see, there’s a lot to think about.
In most cases, your campaign funds will be liable as income tax, and you’ll have to declare this and do the relevant paperwork. If your campaign’s situation is complicated, it can be easier to hire a tax advisor who has a lot of experience in crowdfunding taxes.
