written by Michael Wirth
Entrepreneurs, non-profits, creative thinkers, individuals with financial needs, etc. have all turned to crowdfunding as an alternative way to raise funding. Social media has made it much easier to connect with people that share a common passion, pooling small amounts of money, to support a project or goal. While some websites have certain requirements nearly anyone can create an account, build a crowdfunding campaign, and post it. The taxability of this relatively new phenomenon has recently come into question.
The tax treatment of crowdfunding activities was examined in a new information letter by IRS Chief Counsel. In general, Chief Counsel determined, crowdfunding revenues are included in the recipient’s gross income. Gross income generally includes all income from whatever source derived. However, there are some benefits that a taxpayer receives that are excluded from income because they do not meet the definition of gross income or because a specific exclusion exists.
Money received 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 included in income. The facts and circumstance surrounding the receipt of crowdfunding revenue must be considered to determine it is income.
Chief Counsel concluded that crowdfunding revenues generally are included in income if they are not:
1. Loans that must be repaid
2. Capital contributed to an entity in exchange for an equity interest in the entity; or
3. Gifts made out of detached generosity and without any “quid pro quo.”
Crowdfunding revenues also must generally be included in income to the extent they are received for services rendered or are gains from the sale of property.
Chief Counsel also examined constructive receipt rules in relation to crowdfunding. Income, although not actually reduced to a taxpayer’s possession, is constructively received in the tax year during which it is credited to the taxpayer’s account, set apart for the taxpayer, or otherwise made available. Chief Counsel further noted, although income is not constructively received if the taxpayer’s control of the income is subject to substantial limitations or restrictions, a self-imposed restriction on the availability of income does not legally defer recognition of that income.
These are specific issues that Chief Counsel addressed but as the crowdfunding arena continues to develop, more guidance on this issue will follow. Contact us if you have any questions 417-881-0145.