Crowdfunding: Is It Taxable?

Crowdfunding is the process of asking members of the general public for small amounts of money through any one of hundreds of crowdfunding websites.

Crowdfunding is used by both individuals and businesses, and the amount raised is substantial: over $17 billion is generated yearly through crowdfunding in North America.1

Is this money taxable? Though it may seem strange given the amount of crowdfunding going on, there has yet to be a court decision or IRS ruling on the subject. The IRS has issued only two brief information letters. The gist of the information letters is that “the IRS will examine all facts and circumstances . . . and use general principles of income inclusion to determine the proper tax treatment.”2

Under these general principles, gross income includes “all income from whatever source derived,” except where otherwise provided by law. Thus, money obtained through crowdfunding is taxable income to the recipient unless there is a specific exception.

Not all crowdfunding is the same. There are four main types:

  1. Donation-Based
  2. Rewards-Based
  3. Equity-Based
  4. Debt-Based

Let’s look at each and apply the general principles of income inclusion.

Donation-Based Crowdfunding

Individuals use Crowdfunding sites such as GoFundMe to solicit donations for themselves or others. Donations can be solicited for any purpose, but typical campaigns involve raising money for medical expenses, youth sports, or education costs.

With donation-based crowdfunding, donors do not receive any goods or services in return for their money.

Like any other income, crowdfunding donations are taxable to the recipients unless there is an exception to the general rule. Fortunately, there is an exception: these donations are tax-free if they qualify as gifts.

The average amount raised in such crowdfunding campaigns is $824, with an average donation of $96. There is no limit on donations, and people with truly compelling stories have raised extraordinary amounts—in some cases $1 million or more.

Like any other income, crowdfunding donations are taxable to the recipients unless there is an exception to the general rule. Fortunately, there is an exception: these donations are tax-free if they qualify as gifts.

The definition of a gift is rather vague and highly fact-intensive. The basic rule is that a gift must be motivated by “detached and disinterested generosity” and made “out of affection, respect, admiration, charity or like impulses.”5 Thus, if a transfer of money or property is made from a sense of obligation or in exchange for services, it is not a gift and is taxable income. It is the transferorʼs intent that matters.

Because the donor receives nothing of economic value in return, crowdfunding donations ordinarily qualify as tax-free gifts. But there are exceptions, and the IRS has said that a voluntary transfer via crowdfunding without a quid pro quo is not necessarily a gift.6

One exception is when an employer donates to an employee through a crowdfunding website—for example, to help pay the employee’s medical bills. Transfers by an employer to an employee do not qualify as gifts, even if made out of charitable impulses.7 Such transfers must be included in the employee income.

Note that a person who makes a donation to an individual through a crowdfunding website canʼt take a charitable deduction, even if the recipient is needy and highly deserving of charity.

Money gifted to individuals is never deductible by the giver.

Only donations made to Section 501(c)(3) organizations are deductible. It is possible to make donations directly to 501(c)(3) organizations through GoFundMe and other crowdfunding websites. These donations would be deductible for taxpayers who itemize.

There is no limit on the number of tax-free gifts a person may receive each year. But if a donor contributes more than the annual gift tax exclusion to a single individual, he or she would have to file a gift tax return on IRS Form 709 and apply the lifetime estate and gift tax exemption (also known as the unified credit). For 2023, the annual gift tax exclusion is $17,000 per person and the unified credit is $12.92 million. Amounts gifted over $17,000 reduce the credit.

Rewards-Based Crowdfunding

Rewards-based crowdfunding is an alternative form of small-business financing. Unlike donation-based crowdfunding, contributors or backers receive products or services from the business in return for their money. The best-known websites for rewards-based crowdfunding are Kickstarter and Indiegogo.

This form of crowdfunding is typically used by start-up businesses, but established businesses use it as well. It is often used for creative enterprises, including music, publishing, comics and illustration, film and video, design, and crafts. But all types of products and services are promoted through this type of crowdfunding.

The reward given to each contributor is generally based on the size of the contribution—the larger the contribution, the greater the reward. For example, a Kickstarter project that developed a playhouse for cats gave small contributors a picture of cats with the contributorʼs name inscribed on it, while larger contributors were given a set of blocks to build the playhouse.

Money received this way is ordinarily taxable income to the business. It is clearly not a gift if the contributors receive something of value in return for their money. But there are possible exceptions where contributions could be gifts—for example:

  • If a backer contributes too little to qualify for any type of reward,
  • If a backer chooses to forgo the reward, or
  • If the reward a backer receives has no economic value (such as a handwritten thank-you note).

The expenses incurred to undertake the crowdfunding campaign, including crowdfunding website fees and the cost of the rewards, would be deductible business expenses.

But if the expenses are start-up expenses incurred before a new business begins operation, they would be subject to annual limits. Up to $5,000 in start-up expenses are deductible the first year a business begins operation, with any remaining amounts amortized over the next 15 years.

A business begins for tax purposes when it starts to function as a going concern and performs the activities for which it was organized.9 Conducting a crowdfunding activity alone may not be considered engaging in an active business.

In some cases, a project financed through rewards-based crowdfunding might not rise to the level of a business and might qualify only as a hobby for tax purposes. Hobbyists may not deduct hobby expenses, except for the cost of goods sold. But they must report and pay tax on their hobby income, including rewards-based crowdfunding income.

Equity-Based Crowdfunding

With equity-based crowdfunding, no goods or services are given to investors. Instead, they get shares in the company or, in some cases, convertible notes that can be turned into shares later. Websites for equity crowdfunding include Republic, CircleUp, and Fundable.

Equity crowdfunding enables a business to raise a substantial amount of money without taking on new debt. But to prevent fraud and other abuses, companies that use equity crowdfunding must comply with federal and state securities laws.

The U.S. Securities and Exchange Commission (SEC) allows private companies to legally raise up to $5 million in a 12-month period through equity crowdfunding.11 But the business must comply with financial and other disclosure requirements and make filings with the SEC.

A business, typically a corporation, does not have to pay business taxes on funds raised by issuing securities to investors. Such funds are not considered business income.

Debt-Based Crowdfunding

Debt-based crowdfunding, also called peer-to-peer (P2P) lending, is an alternative to traditional loans. Instead of borrowing money from a bank, a business or individual obtains a loan from a lending website. These are formal loans with a specified principal amount, interest rate, term, and monthly payment schedule.

For each loan it approves, the crowdfunding lender issues a series of notes that it offers to investors through its website. Payment on the notes is contingent on payment of the underlying loan by the borrower. The lending website charges the borrower a loan origination fee and charges the investors a service fee.

Loans that have to be paid back are not taxable income to the borrower. If a crowdfunding loan is business-related, the interest is a deductible business expense. The borrower should also be able to deduct the loan origination fee as original issue discount (OID) interest expense over the life of the loan.

IRS Reporting of Crowdfunding Payments

Many rewards and donation-based crowdfunding websites use third-party settlement organizations (TPSOs) such as PayPal to collect and pay out money from contributors. Others handle the payments themselves. Starting with payments made in 2022, TPSOs must issue an IRS Form 1099-K, Payment Card, and Third Party Network Transactions whenever the total payments distributed to a person or business exceed $600. This rule also applies to crowdfunding websites and their payment processors, but only for rewards-based crowdfunding where the contributors received goods or services for their contributions. No 1099-Ks need be filed for donation-based crowdfunding.

The deadline for filing is February 28 of the year following the year the payments were made, or March 31 if filed electronically. Payees must be furnished with copies by January 31.

Box 1 on Form 1099-K will show the gross amount paid to the recipient during the calendar year. But the issuance of a Form 1099-K doesnʼt automatically mean the amount reported is taxable income. As discussed above, there could be cases where contributions made through a rewards-based crowdfunding campaign are tax-free gifts.

In this case, the recipient could simply not report the amount on his or her tax return. (That said, a better strategy is to report the amount, create a line-item subtraction, and disclose that this amount is a gift. The reason for reporting is to match what the IRS has in its matching computer files.)

Alternatively, the recipient could include an explanation with his or her return on IRS Form 8275, Disclosure Statement.

The IRS may contact the recipient for more information, and he or she should then explain why the distributions were gifts.


Contributions made to individuals through donation-based crowdfunding websites such as GoFundMe are tax-free gifts so long as the contributor receives nothing of economic value in return.

But crowdfunding contributions by employers to employees are always taxable income to the employee.

Crowdfunding donations made to individuals are not deductible charitable contributions, but contributions made to 501(c)(3) charities through crowdfunding websites are deductible.

Contributions made to individuals or businesses in return for goods or services are ordinarily taxable income to the recipient.

Businesses that use equity-based or loan-based crowdfunding to raise capital do not pay tax on the funds received.

Contributions over $600 made through rewards-based crowdfunding websites are reported to the IRS on Form 1099-K.

It’s that time of the year when many of us choose this time to make our annual charitable contributions to some of the many deserved organizations or individuals in need.

Many of us are familiar with several of the crowdfunding resources available. Crowdfunding has become a national and international phenomenon. Over $17 billion is raised annually in North America through better-known and credible websites such as GoFundMe and Kickstarter.

Given that there is practically no guidance from the IRS regarding this topic, I present to you the four main types of crowdfunding in this article.

If you have questions, need clarity, or need help understanding how to best strategize your Charitable Giving and Donations and/or to further help retain or maximize your financial gains, please contact us at Morris + D’Angelo. This is our Expertise!

At Morris + D’Angelo, we believe that Tax Optimization is one of the most empowering and responsible things you can do to protect your growing financial assets. Tax optimization looks at a multi-year approach to minimizing tax costs. Tax avoidance is integral to tax optimization.

Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo

Daniel Morris
Daniel frequently provides Media Content via Workshops, Podcasts, and Printed Articles on topics like Bitcoin and Cryptocurrency, Wealth Preservation and Planning, Global Banking, and many other high-level financial topics that serve and demonstrate the Value of our Global Network that should be of interest to those who need Private High-Wealth Services.

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