Crowdfunding Tax ConcernsCertainly, it’s no secret that I’m an advocate of crowdfunding. Capital is tight for most startups, and what better way to appeal for financing than to your loyal fans, customers, and followers. But as with any event where money changes hands, the IRS will be there waiting for their cut. Some tax points to consider:

1. Your reward or perk may be taxable

So, I’ve heard the countless arguments of the campaign owners stating that they’re not selling anything, rather they are just giving away items to their supporters. WRONG. The IRS does not view it as such. Technically, there was a bona fide exchange of money and goods (aka sale). Let’s say the campaign gives out absolutely nothing except digital thank you cards, guess what – that’s still income. It might not be sales income, but it’s still income generated for your company. Unless your an exempt entity or a charitable organization, the IRS will undoubtedly take their share of the collections.

What’s worse is that if you are shipping tangible goods (aka t-shirts, watches, posters), you might actually need to collect/pay sales tax. Often I advise campaign owners to try and offer things digitally to avoid having such headaches.

2. The money is not a gift

Just because you label something as a gift, that does not mean it really is a gift. Gifts mean that there’s no intention of the donator / backer to receive anything in return. But since you explicitly state on your campaign that at $X contribution, item A will be given, then the donator / backer already has an expectation of receiving something. Hence, there is no real “gifts” in the world of crowdfunding.

3. Can you still have $0 tax liability?

Yes! If you use all the contributions you received to cover the necessary expenses of manufacturing / developing the product, then technically you have no liability. Example: You collected $50k in funding. Now as promised on the campaign, you have to ship out 5,000 t-shirts to your backers. The cost to make and deliver the t-shirts are at $10. Hence you have $0 revenues and $0 liability ($50,000 funding – $50,000 cost of t-shirts =$0). Of course most campaigns are not structured as such, so in real life this never happens.

 

Note: This article primarily focuses on rewards based crowdfunding, as legislation has still not been clearly defined or enacted for equity or debt based financing. But in most respects equity / debt based crowdfunding will not encounter income tax or sales tax issues inherent in rewards based programs, as they are viewed as investors and subject to a whole new set of rules.

 

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