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IRS Comments on Crowdfunding

Recently Released Information Letter Reveals What the IRS is Thinking

In an Information Letter released this past June, the IRS provided their view on the tax treatment of crowdfunding.

Under general rules laid out by the Tax Code, gross income includes all income from whatever source derived. This rule applies whether the income is realized in the form of cash, property or other economic benefit. Some benefits, however, are excludable from income, either because they do not meet the definition of gross income or because the law provides a specific exclusion for certain benefits that Congress chooses not to tax.

Crowdfunding is a relatively new practice of funding a project by gathering online contributions from a large group of backers. It has become a popular way to raise capital for a wide variety of projects from community development to the arts to technology.

Initially, crowdfunding was used by musicians, film makers, and other creative types to raise small sums of money for projects that were unlikely to turn a profit. But the impact of crowdfunding has grown to become an alternative to venture capital.

The benefits received by contributors to a crowdfunding project in return for their contributions varies considerably. Sometimes contributors receive nothing but the personal satisfaction of helping to launch a cause or create an innovation that they believe in. Often contributors are offered "rewards" of small or nominal value, such as cups with a logo, tee shirts, or tickets to an event. In other cases, contributors may receive the right to have their contributions repaid with interest if the campaign is financially successful. Or they may receive an equity interest in the business.

To date, there have been no court cases or IRS rulings directly addressing the taxation of contributions to a crowdfunding project. In the June Information Letter, the IRS concluded that as a general rule, money received without an offsetting liability (such as a repayment obligation), that is neither a capital contribution to a business enterprise or a gift, is includible in income. The facts and circumstances of a particular situation must be considered to determine whether the money received is income.

What that means is that crowdfunding revenues will generally be includible in income if they are not:
  1. loans that must be repaid;
  2. capital contributed for an equity interest in a business entity; or
  3. gifts made out of detached generosity and without any "quid pro quo." 
Essentially, IRS said the answer as to whether there are any income tax consequences to a taxpayer of a crowdfunding effort is "it depends".

If you have questions about a crowdfunding undertaking, be sure to give us a call.


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