In the FS-2024-28, the IRS reminds us how to treat crowdfunding transactions. Note that there were several articles and posts published related to this topic in the IRS website (See links below) and now the IRS is updating some of their guidance, like the 1099K thresholds.

If there is a platform or website to request the crowdfunding, the platform (similar to third party processing entities) will be required to release a 1099K if the thresholds are met and there are details on how to fill out specific areas or boxes in the form.

  • Calendar year 2024 – The IRS announced a plan for the threshold to be reduced to $5,000 as a phase-in for the lower threshold provided under the ARPA. See IR-2023-221.

Note: The ARPA lowered the reporting threshold for third party settlement organizations (TPSOs) so that TPSOs are only required to report on Forms 1099-K if the total of all payments distributed to a payee in a calendar year exceeds $600, regardless of the number of transactions. However, implementation of this lower threshold has been delayed.

For the recipient of the contributions, it can be categorized in different buckets. Below are some examples, but it will depend on the facts and circumstances of each case:

  • Gift – It would be detached and disinterested generosity like crowdfunding effort for a cancer patient
  • Gross income – In some cases, the crowdfunding includes merchandise or first generation product for a reduced price. This should be considered a sale as consideration is given for a product or service even if at a discounted price.
  • Equity / Capital injection – The IRS does not reference this option, but there are many crowdfunding platforms that offer ownership on companies through funding rounds and subject to Reg A+ and/or Reg CF. In this case, the purchaser/investor will be buying shares in private companies, relatively illiquid investments and subject to higher risk than public consolidated companies. The company will recognize the capital influx as equity contribution.

For further details on this topic, please, reach out to us as the categorization depends on the nature and exchange with the donor/customer/investor.

Link IRS March 2022 – Money received through “crowdfunding” may be taxable; taxpayers should understand their obligations and the benefits of good recordkeeping

Link IRS August 2022 – Some things to know about crowdfunding and taxes

Link IRS – IRS reminds taxpayers of important tax guidelines involving contributions and distributions from online crowdfunding

Link Journal of Accountancy – Fact sheet addresses taxability of crowdfunding distributions