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The Tax Implications of Crowdfunding

Issue

What are the tax implications of crowdfunding?

Analysis

The IRS has not released specific guidance regarding crowd-funding, but based on regulations regarding income in general, the tax implications can be determined by examining the intentions of the donor and recipient.

Summary

Source: IRS Publication 525, IRS Form 709 Instructions

The tax implications depend on what the crowdfunding is used for and whether the donor is receiving anything in return for the contribution.

If the donor receives nothing in exchange for the contribution to the fundraiser, then the income will usually be considered a gift. In this case, there will be no tax owed by the recipient, and usually no tax owed by the donor.

If one donation exceeds $14,000, the donor must file a gift tax return. An important exception to this is if the donation is paid on behalf of an individual directly to a person or institution that provided medical care for the individual.

**Important Note: In cases where the donor is assessed a gift tax and does not pay this tax, the recipient of the gift may have to pay the tax.

There will likely be no definite regulation on crowdfunding until a case is brought before the tax court. It is important to maintain records and documents regarding the funding and the use of the funds because of the ambiguity of the issue.

Source 1: IRS Publication 525

Expenses paid by another. If your personal expenses are paid for by another person, such as a corporation, the payment may be taxable to you depending upon your relationship with that person and the nature of the payment. But if the payment makes up for a loss caused by that person, and only restores you to the position you were in before the loss, the payment is not includible in your income

Gifts and inheritances. In most cases, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you.

Source 2: IRS Form 709 Instructions

The donor is responsible for paying the gift tax. However, if the donor does not pay the tax, the person receiving the gift may have to pay the tax.

Medical exclusion. The gift tax does not apply to an amount you paid on behalf of an individual to a person or institution that provided medical care for the individual. The payment must be to the care provider. The medical care must meet the requirements of section 213(d) (definition of medical care for income tax deduction purposes). Medical care includes expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, or for transportation primarily for and essential to medical care. Medical care also includes amounts paid for medical insurance on behalf of any individual. The medical exclusion does not apply to amounts paid for medical care that are reimbursed by the donee’s insurance. If payment for a medical expense is reimbursed by the donee’s insurance company, your payment for that expense, to the extent of the reimbursed amount, is not eligible for the medical exclusion and you are considered to have made a gift to the donee of the reimbursed amount. To the extent that the payment was for something other than medical care, it is a gift to the individual on whose behalf the payment was made and may be offset by the annual exclusion if it is otherwise available. The medical and educational exclusions are allowed without regard to the relationship between you and the donee. For examples illustrating these exclusions, see Regulations section.