Crowdfunding is a popular way to raise money.

Whether it’s for an individual, family, or workplace; crowdsourcing allows for numerous small donations to go toward a single cause. This method can lead to some incredible things happening; families being able to pay off medical debt, start-up entrepreneurs finally launching their brands, or someone bringing an idea to life.

But all this money comes with a cost. The IRS sets clear instructions on how to handle donations which must be followed by people using the crowdsourcing method.

Failing to review the tax implications of crowdsourcing can get you in serious trouble. That’s why we’ve listed the top four things to know about crowdfunding taxes.

1. There is a Threshold for Reporting

Just because money was given to you through crowdsourcing does not mean that the IRS won’t know about it. In most instances, the platform that was used to organize the crowdsourcing (like GoFundMe or Kickstarter) when more than $600 was raised in a year for a taxpayer. However, this can vary by state. For example, the threshold for Missouri residents is $1,200.

2. You Might not have to Pay Tax

Even if you received more than $600 from crowdsourcing you might not have to pay tax on it. That is because receiving a 1099-K (the form required to claim the money by the IRS) does not automatically mean that the funds reported will be taxed. That’s because it varies depending on the type of fundraiser and who received the money.

According to the IRS, if money was received as a gift then it will be considered tax-free. A ‘gift’ (in the crowdsourcing sense) means any money that was given to a person without receiving or expecting anything in exchange for it.

Further, crowdsourced money will be considered tax-free if it is raised for someone else, and all of the funds are going toward that person. In this instance, the person who raised the money by organizing the platform does not need to claim anything on their income tax as the IRS does not see that as taxable income.

3. Certain Campaigns Can Be Taxable

There are a few instances where the IRS might be looking for tax from a crowdsourced campaign. The IRS states that if a person is donating in exchange for a good or service they might need to claim it as income. In this sense, the IRS believes that anything given in exchange for something else is not a gift and therefore will be taxable.

Another circumstance where tax may be owed is if an employer is contributing to an employee’s crowdsourcing efforts. Although this may seem innocent enough, according to the IRS, it is viewed as income and will need to be claimed as gross income come tax time.

4. Business Funding Can be Complicated

When money is raised to start a business, this is where things can get complicated. After all, the IRS does not deem crowdsourcing to be a gift if it’s given with the expectation of receiving a good or service in exchange. So, what does this mean for businesses that will be expected to launch their brand? Well, if the money was raised by incentivizing donors with a product or service then they will be liable to report the donations as business income.

But, if money was raised through ‘equity crowdfunding’ (offering donors a share in the company in exchange for money) then this won’t need to be reported to the IRS seeing as it isn’t technically seen as income but rather as an investment.

Regardless of its tax implications, crowdfunding is an incredible way for individuals to earn money, jump-start their dreams, or directly help a neighbor that’s struggling.

However, failing to think about the tax implications for yourself or the person you’re helping can leave people in an uncomfortable situation come tax time which is why we’re here to help. We offer personalized advice on crowdsourced taxes and can look at individual circumstances to ensure any money received is being claimed property.

For more information give us a call at 407-328-5001.

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