Crowd Funding


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Crowdfunding is used to solicit financial contributions

from a large number of people, referred to as backers,

over the internet. The financial contributions are used

for a wide variety of projects including business ventures,

social causes, and support for individuals with

a special need. By using the internet, projects can gain

access to funds outside of traditional sources such as

banks or capital markets. A number of organizations,

referred to as platforms, have developed to connect

someone seeking funds with those who have an interest

in contributing. The use of crowdfunding has developed

rapidly in the last twenty years with billions of dollars

being raised each year by this method and hundreds of

projects being launched on a daily basis.

Typical Projects

Crowdfunding for creative efforts such as music, gaming,

and movie projects have raised some of the largest

amounts of money. High tech projects are also very common.

Some examples include Pebble E-Paper Watch,

Formlabs 3D Printer, and Oculus Rift. The Tile app for

finding lost items received support from crowdfunding.

The ALS (amyotrophic lateral sclerosis) Ice Bucket challenge

is an example of a recent highly successful campaign

to raise money to battle an incurable disease.

Crowdfunding a Project

Project initiator. The individual or organization, referred

to as a project initiator, seeking to fund a project

determines the funding need and deadline, selects the

platform most suited to the project, and creates a presentation to attract backers.


Fees. The platform will typically receive 3% to 5% of the

funds raised. The company holding and paying out the

funds will typically charge 3% to 5% of the funds.

Backer Involvement

Crowdfunding offers potential backers the opportunity to

search for a wide variety of projects that appeal to them.

Backers receive the satisfaction of donating to a project

with a relatively small donation that is easily made.

Rewards or payoff. In addition to the satisfaction of giving,

the backer may receive something in return with no

or very little monetary value up to a stake in the company.

Risks. Backers run the risks of scams and no pay-off from

an investment in a high risk project. Due diligence can be

very difficult to perform. If the funds are released on an

All or Nothing basis, then backers will see a credit card

charge for projects that do not reach their funding goal. If

funds are released on a Keep it All basis, then the backer

must rely on the project initiator to return unused funds.

Tax Issues

Crowdfunding can create a number of tax issues. In

some cases, there is little guidance from the IRS or state

governments on how to treat the transactions.

Tax deductions. Generally, contributions to a crowdfunded

project will not be deductible unless the project

is a qualified charity. Contributions to an individual are

not deductible.

Gift tax. Unless the backer makes a very large gift (over

$15,000 in 2018) or has made other large gifts, a gift tax

return will not be required.

Capital gains/losses. If the backer receives shares in a

company, then a record of the basis of the shares and

date(s) acquired must be kept. A capital gain or loss will

occur when the shares are disposed of or in the event of

a project failure.

Loans. If the backer receives interest from a loan to a

project, then the interest will need to be reported. In the

event of a project failure, the backer may be able to deduct

the loan as a bad debt.

Platform. The platform makes the presentation available

to a large number of backers via the internet and

may provide other services to the project.

Backers and pledges. Interested backers are able to

make pledges using a credit card. The organization serving

as the platform will typically use a company such as

Paypal or Amazon Payments to collect and release the

funds. The release of funds is based on either the All or

Nothing or Keep it All method.

All or Nothing. Funds are released to project and backer

credit cards are charged only if the funding goal is

met by the deadline.

Keep it All. In this case, funds are released to the project

and credit cards are charged when the deadline occurs.

The project initiator decides whether to proceed with

the project with partial funding or return the pledges.

Crowdfunding Platforms

There are hundreds of platforms available to project initiators.

Some of the larger or more well-known platforms

are Kickstarter, Indiegogo, Crowdfunder, Rockethub,

Crowdrise, and appbackr. Due diligence on the part of

the project initiator is necessary to find the platform most

suited to a particular project and avoid scams or other issues.

The focus for these platforms is summarized below:

Platform Project Focus

Kickstarter.................... Creative projects

Indiegogo...................... All types

Crowdfunder................. Investment

RocketHub.................... Creative projects desiring follow-on support

Crowdrise..................... Causes and charities

appbackr...................... Mobile apps

Taxable income. When an individual or nonprofit cause

receives a gift, the income is generally not taxable to the

recipient. Depending on the amount received and the

number of backers, the recipient may receive a Form

1099-K, Payment Card and Third Party Network Transactions,

from the payment vendor. The individual will

need to consider how to inform the IRS that these funds

are a gift and not income. A nonprofit will have to consider

whether to file for exempt status and whether to

file a 990 series tax return.

A business receiving pledges will need to determine if

these pledges are taxable income or nontaxable gifts.

Self-employment tax. A business operating as a sole

proprietorship that has taxable income will owe selfemployment

tax on the income.

Sales tax. A business providing a product to backers

in return for a donation may owe sales tax in the states

where the backers reside. Sales tax rules vary widely from

state to state.


Crowdfunding is a new, exciting, and successful method

of raising funds for individuals in need, causes with

social value, and business start-ups. Individuals and

causes are able reach a large number of potential donors.

Businesses are able to raise funds outside of more

complex and expensive methods in the traditional banking

and capital markets. Backers can select from a wide

range of projects that they may wish to contribute to.

On the other hand, crowdfunding raises business, legal,

and tax issues where the rules have not been firmly

established. In many cases, the project initiators may

not be fully aware of these issues until after funds have

been raised and tax returns need to be filed.

Contact Us

There are many events that occur during the year that can affect

your tax situation. Preparation of your tax return involves summarizing

transactions and events that occurred during the prior

year. In most situations, treatment is firmly established at the

time the transaction occurs. However, negative tax effects can

be avoided by proper planning. Please contact us in advance

if you have questions about the tax effects of a transaction or

event, including the following:

• Pension or IRA distributions.

• Significant change in income or


• Job change.

• Marriage.

• Attainment of age 59½ or 70½.

• Sale or purchase of a business.

• Sale or purchase of a residence

or other real estate.

• Retirement.

• Notice from IRS or other

revenue department.

• Divorce or separation.

• Self-employment.

• Charitable contributions

of property in excess of