Crowdfunding campaigns are designed to raise money for individuals or causes and have risen in popularity in recent years. Some nonprofits have benefited from the trend. But supporters and organizers of crowdfunding campaigns may not understand the tax implications. These can differ significantly from tax rules for traditional charitable giving. If your organization is considering a crowdfunding initiative, you need to educate yourself and your supporters.
The IRS defines crowdfunding as a method of raising money through websites (for example, GoFundMe, DonorsChoose or Classy) by soliciting “contributions” from a large number of people. While the practice sometimes is used to fund businesses or other for-profit projects, it also can solicit donations for charitable causes and nonprofits. Your organization might, for example, run a crowd-funding campaign for a specific organizational project or to generate funding for an urgent need among one or more of your constituents. In addition, supporters of your organization might start a crowd-funding campaign to generate donations for you.
Under tax law, the crowdfunding website or its pay-ment processor may be required to report distributions of funds by filing IRS Form 1099-K, “Payment Card and Third-Party Network Transactions.” If so, it also must provide a copy to the recipient of the distributions. Previously, the report-ing threshold was met if, during a calendar year, the total of all payments distributed to a person exceeded $20,000 in gross payments resulting from more than 200 transactions or donations. However, beginning in 2023, the threshold has dropped dramatically. Now it’s met if the total of all payments distributed to a person exceeds $600 in gross payments in a calendar year — regardless of the number of transactions or donations. If the crowdfunding platform distributes money raised from a campaign to the campaign’s organizer, the organizer should receive a copy of Form 1099-K. If distributions are made directly to individuals or organizations for whom the organizer solicited funds, the form will be furnished to those individuals or organizations that receive amounts above $600. Issuance of a Form 1099-K doesn’t necessarily mean the number of distributions is taxable to the recipient. The IRS has said that income tax consequences depend on the particular facts and circumstances.
If the crowdfunding platform distributes money raised from a campaign to the campaign’s organizer, the organizer should receive a copy of Form 1099-K.
Looking at examples
Consider, for example, Jane, a loyal supporter who starts a GoFundMe campaign that raises more than $600 for your organization and subsequently receives a Form 1099-K. If she distributed all of the money to your nonprofit, the distributions in Box 1 probably won’t be taxable to Jane. However, donors to the campaign might not be able to deduct their contributions because the campaign wasn’t run by your organization. Say you launch a crowdfunding campaign to raise funds for a specific client with immediate medical needs, and the platform distributes the money directly to the client. According to the IRS, if contributions are made as a result of the contributors’ “detached and disinterested generosity,” and without an expectation of receiving anything in return, the amounts may be gifts and therefore aren’t taxable to your client. Again, though, those contributions might not be tax-deductible for donors.
Don’t be surprised
While crowdfunding certainly has some appeal for nonprofits, the tax rules can be complicated and catch organizers, supporters and recipients by surprise. Consult with your CPA to make sure you cover your bases.