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IRS Issues Information Letter on Crowdfunding

Whether by donating to a sick child or investing in the next great product, many of us have contributed to crowdfunding campaigns through websites such as Kickstarter and GoFundMe. Crowdfunding is essentially raising nominal monetary contributions from a large number of people, generally via the Internet.

There is little, if any, IRS guidance on the taxability of contributions received by a crowdfunding campaign. However, crowdfunding campaigns have begun to increase in size and complexity, going so far as to repay contributors with interest or provide equity in a project. The IRS does address crowdfunding taxation in Information Letter 2016-0036 by looking at the general principles of income inclusion.
 
The IRS concluded that, generally, money received by a company without an offsetting liability—such as a repayment obligation—that is neither a capital contribution to an entity in exchange for a capital interest in the entity nor a gift is includible in income. As such, the facts and circumstances of a crowdfunding campaign must be considered to determine whether the money received in that situation is income. Crowdfunding revenues are typically includible in income if they are not:

  • Loans that must be repaid.
  • Capital contributed to an entity in exchange for an equity interest in the entity.
  • Gifts made out of detached generosity and without any quid pro quo. A voluntary transfer without a quid pro quo isn’t necessarily a gift for federal income tax purposes.   
 
Finally, crowdfunding revenues must generally be included in income to the extent they are received for services rendered or are gains from the sale of property.
 
About Alan Wink

Mr. Wink assists clients with capital budgeting, capital structuring and capital sourcing. He has worked with many tech and life science companies on developing the appropriate capital structure for their position in the business life cycle.

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