tax tips | June 21, 2019 | By Susannah McQuitty
You might have to pay taxes on your campaign, but in some cases, you might not. So how do you tell the difference?
Do you have to pay taxes on the money that backers send?
The most foolproof way to tell whether your crowdfunded money is taxable is to simply ask, “Why are people sending money?”
If your contributors are giving money as a donation and don’t expect to get anything from you as a reward, their contributions are considered a gift and aren’t taxable—so you don’t have to pay taxes on a crowdfunded campaign if there is no rewards tier.
Do your backers expect something in return?
However, you do owe taxes on at least part of the contributions if your backers expected something in return. Rewards like t-shirts, pre-ordered products, or other things with monetary value are taxable for the reward tier’s minimum amount.
Say you promise a t-shirt if a backer sends $30. You will have to pay tax on the $30, since the contributor gave you money and you gave a product in return—but you only have to pay tax on the $30, not any extra they may donate for that reward tier. This is because contributions greater than the minimum amount for the product is totally up to the backer. So, if a contributor sent $50, you’ll pay taxes on the $30 but not the remaining $20.
Are contributors buying stock or equity in your startup?
If your contributors are giving money to buy equity in your startup, they are making an investment in your company and not actually paying you as an individual. So, you don’t have to pay taxes on a crowdfunded campaign if contributors are buying stock or equity in your startup.
Can you get tax deductions for backing a crowdfunded campaign?
Most crowdfunded campaigns are for personal projects or needs, but some are run by certified charities to raise money for their organizations. If you make donations to a qualified 501(c)(3) charitable organization, you can actually get a tax deduction for your contributions!
Not sure if the campaign you backed is run by a 501(c)(3)? Check out the IRS Tax Exempt Organization Search to see if it makes the list. And, of course, remember that you can only use this deduction if you itemize deductions on your taxes—so you’ll need to contribute a lot of money or have plenty of other deductions to make itemizing worth it. (Taking the standard deduction is the easiest way, and often saves you more money.)
Let us know in the comments below if you have any more questions about backers, contributions, and tax breaks for your crowdfunded campaign!