In the age of online connectivity and ease of social sharing, many individuals are turning to the Internet to raise money for personal endeavors. This concept, defined as crowdfunding, is done through sites like Kickstarter, Indiegogo, GoFundMe, and Causes.
How does it work?
A person brings his or her idea/project to one of these sites and creates a campaign. Through tools like social media, the person can share the idea. If others like it, they can choose to contrite a monetary amount towards it.
Types of Crowdfunding
According to Cheryl Metrejean and Britton McKay in an article published in the Journal of Accountancy, there are three types of crowdfunding:
- Reward-based, for creative enterprises;
- Donation-based, for personal fundraising; and
- Equity based, for raising capital for companies.
Crowdfunding and Taxes
Many people that participate in crowdfunding do so with little thought to the tax ramifications. Crowdfunding is becoming increasingly more popular, and Congress and the IRS have not addressed this type of income, which leaves it difficult to decipher how it should be reported. Metrejean and McKay mention that while sites like Kickstarter and Indiegogo mention taxes on their websites, neither provide definitive information on reporting crowdfunding income and paying taxes.
A few important things to consider are:
- Whether the crowdfunding activity is deemed a trade or business or a hobby;
- Whether the activity is deemed a startup business;
- The method of accounting used by the creator; and
- The value of reward given to backers.
As stated earlier, tax support and guidance remains unclear for crowdfunding campaigners. For assistance related to this topic, please visit the referenced article or contact Brenda Jacobs at (231) 726-5880 or bjacobs@brickleydelong.com.
Individual & Business Tax Preparation, Closely-Held Businesses