Raising funds in small amounts from a large pool of people, also known as crowdfunding, has become a popular way for budding entrepreneurs to drum up the working capital for pet projects. It seems like everyone from twenty-somethings to stay-at-home parents to retirees is getting in on the act.
Here’s how the process works. Let’s say you have an idea for a new product that you’re unable to obtain funding for through conventional means, such as a bank loan. You turn to the internet, find a website that specializes in crowdfunding, and release your idea into the world. Investors read the description of your project and decide whether or not to help promote and fund it. In return, investors may receive an equity share in your project once it’s up and running, or a small gift such as a coffee mug or mousepad with your company logo. In some cases, supporters contribute with no expectation of a return.
But what about the tax consequences? Are the funds you receive taxable to you? In part, the answer has to do with your control over the money. Generally, funds you receive are taxable if credited to your crowdfunding account or set aside or otherwise made available so that you can withdraw the cash if you choose. In addition, crowdfunding revenue can be taxable to the extent it is received for services rendered or it results from a disposition of property.
In some cases, your crowdfunding efforts may not result in taxable income. As a general rule of thumb, examples of nontaxable crowdfunding receipts include a loan you must repay, a capital contribution made in exchange for an equity interest, or a genuine gift.
As always, the tax consequences will depend on your individual situation. Contact us for assistance if you’re thinking of launching a crowdfunding effort.
If you have questions about how taxes related to crowdfunding works, please contact us at Cisco & Co CPAs. We have suggestions and tips to help you avoid having to deal with these consequences.