Do You Have to Pay Taxes on Crowdfunding Money? Let’s Find Out!
Crowdfunding has become a popular way to raise money for different reasons, such as medical bills, creative projects, and business startups. But there is one big question: Do you have to pay taxes on crowdfunding money? The answer is not just a simple “yes” or “no.” It depends on different factors. Let’s break it down in a simple way so you can understand how taxes work for crowdfunding money.
What Is Crowdfunding?
Crowdfunding allows people to collect money from others online. It is a way for individuals, businesses, and nonprofits to raise funds for different purposes. Instead of relying on traditional funding sources like banks or investors, people can ask the public for financial support.
This method has grown in popularity because of the ease and reach of the internet. There are different platforms designed for specific types of crowdfunding:
- GoFundMe – Used mainly for personal needs, such as medical expenses, funerals, and emergencies. People often create campaigns to seek help from friends, family, and even strangers.
- Kickstarter – A platform for creative projects, such as making a video game, book, movie, or new tech gadget. Backers pledge money in exchange for rewards, like early access to the product.
- Patreon – A site where artists, writers, musicians, and other content creators receive monthly financial support from fans. In return, supporters may get exclusive content or special perks.
Crowdfunding can be an amazing tool to bring ideas to life or get support during tough times. But here is the tricky part: The IRS (the tax authority) might want a share of that money. Let’s find out how it works.
Is Crowdfunding Money Considered Income?
The IRS has a simple rule: Most money you receive is taxable income unless it fits into specific exceptions. Here’s how it applies to crowdfunding:
What Counts as Taxable Income?
The IRS defines income as money earned from:
- A job or freelance work.
- Selling products, services, or art.
- Business activities like running a company.
If your crowdfunding campaign is tied to a business, project, or service (like selling products on Kickstarter or offering exclusive content on Patreon), the IRS considers it taxable income. You must report it when you file your taxes.
When Is Crowdfunding Money NOT Taxed?
There are two main situations where crowdfunding money is not taxable:
1. Personal Gifts
If someone gives you money as a gift with no expectation of receiving anything in return, it is not considered taxable income. The IRS does not tax genuine gifts because they are not seen as earned income. Here are some examples:
- A friend sends you $500 on GoFundMe to help with medical expenses.
- Family members contribute to your wedding fund to help with costs.
- Strangers donate money to support you after a natural disaster.
Gift Tax Rule
The IRS sets an annual gift tax exclusion amount, which means if one person gives you more than $17,000 in 2023, they (not you) must report it to the IRS by filing a gift tax return. However, this does not mean they owe taxes—just that they must report it. Since most crowdfunding campaigns collect smaller amounts from multiple donors, this rule rarely applies.
2. Donations to Charity
If you raise money for a registered nonprofit organization (such as a 501(c)(3)), the funds are not considered taxable income. This means you do not have to report or pay taxes on the money as long as it goes directly to the charity.
However, there’s an important rule for donors: they can only claim a tax deduction if they donate directly to the charity and receive proper documentation. If they contribute to a personal crowdfunding campaign that later gives the funds to a nonprofit, those donations are not tax-deductible.
To ensure tax-free status, it is best to partner directly with a recognized nonprofit when raising money for charitable purposes.
Why Crowdfunding Is Complicated
Crowdfunding does not fit completely into one category, which makes it tricky when it comes to taxes. The way the IRS views your crowdfunding money depends on why you are raising it and what you offer in return. Here are a few examples to help you understand:
- A GoFundMe campaign for emergency surgery might be tax-free as a personal gift. Since donors are contributing out of kindness with no expectation of receiving anything in return, the IRS typically does not consider this taxable income.
- A Kickstarter campaign for a new business, however, is considered taxable income because backers are receiving rewards. When people pledge money in exchange for a product, service, or exclusive perks, the IRS treats the funds as business revenue.
Golden Rule: If you give something in return for money (like a product, service, or special access), it is taxable.
Why does this matter?
Many people assume that all crowdfunding money is a donation, but that is not the case. The IRS evaluates whether the funds are gifts, income, or business revenue based on how they are collected and used. If your campaign looks like a business venture, be prepared to report it as income and pay taxes on it.
To stay on the safe side, always track the purpose of your crowdfunding campaign and what you offer in return. If you are unsure about whether your funds are taxable, consulting a tax professional can help you avoid surprises during tax season.
Tax Forms You Might Receive
Crowdfunding platforms may send you tax forms if you meet certain thresholds:
1. Form 1099-K (For Business-Like Transactions)
- This form reports money earned from selling goods, services, or rewards.
- You will get a 1099-K if you earn over $20,000 AND have 200+ transactions in a year.
- Even if you don’t receive a 1099-K, you still must report the income.
2. Form 1099-MISC (For Miscellaneous Income)
- This form is for non-employee income, like freelance work or prizes.
- You will receive a 1099-MISC if you earn $600 or more in a year.
What If You Don’t Get a Tax Form?
You still have to report all taxable income. The IRS can still check your bank records and platform transactions.
Types of Crowdfunding and Their Tax Rules
Crowdfunding is not the same for everyone. The IRS treats funds differently based on why you’re raising money and what you give in return.
1. Personal Gifts (GoFundMe, etc.)
- What It Is: Money given to you by friends, family, or strangers for personal needs like medical bills, funerals, or emergencies.
- Tax Rule: Usually not taxable if given freely with no expectation of a return.
- When It Becomes Taxable: If money is linked to a project or business (e.g., “Help me start my bakery!”), the IRS may consider it income.
Example:
✅ Tax-Free: A GoFundMe for your father’s cancer treatment. ❌ Taxable: A GoFundMe titled “Help Fund My Coffee Shop.”
2. Donations to Charity
- What It Is: Raising money for a registered nonprofit (501(c)(3) organizations like the Red Cross).
- Tax Rule: Funds are tax-free for you, but donors can only claim tax deductions if they donate directly to the charity.
- Key Tip: If you’re raising money for a nonprofit, partner with them for an official campaign to avoid tax issues.
3. Business or Rewards-Based Crowdfunding (Kickstarter, Indiegogo)
- What It Is: Raising money for a business, product, or project in exchange for rewards (e.g., T-shirts, early access).
- Tax Rule: All money raised is taxable, even if you spend every dollar on the project.
Deductible Expenses
You can subtract expenses related to your project, such as:
| Expense | Example |
| Materials | Fabric, software |
| Production | Manufacturing, packaging |
| Fees | Platform fees (5% + processing) |
| Shipping | Postage, delivery costs |
Key Takeaway: Keep 25-30% of the funds aside for taxes and track every expense.
How to Handle Crowdfunding Money at Tax Time
- Keep Records: Save receipts, emails, and documents related to your campaign.
- Track All Income: Even if you don’t get a tax form, you must report taxable crowdfunding money.
- Deduct Expenses: If your crowdfunding is business-related, track costs to lower your taxable income.
- Report It Correctly: Use Schedule C (business income) or Form 1040 (personal gifts, if taxable).
Common Tax Mistakes to Avoid
Crowdfunding taxes can be tricky, and many people make mistakes that can lead to penalties or unexpected tax bills. Here are some common tax mistakes to avoid:
1. Thinking “No Tax Form = No Taxes”
One of the biggest misconceptions about crowdfunding is that if you don’t receive a tax form, you don’t owe taxes. This is not true. The IRS requires you to report all taxable income, even if you don’t receive a Form 1099-K or 1099-MISC.
For example:
- If you raise $10,000 on Kickstarter and don’t receive a 1099-K because you didn’t meet the $20,000/200 transaction threshold, you still need to report the income.
- If you receive $5,000 in Patreon support, it is still considered taxable income even if no tax form is issued.
The IRS can audit your financial activity, so it’s best to report everything accurately.
2. Mixing Personal & Business Funds
Many people make the mistake of depositing crowdfunding money into their personal bank accounts. This makes it harder to track income, expenses, and deductions.
Best Practice: Open a separate business bank account for your crowdfunding campaign. This makes record-keeping easier and helps if the IRS ever asks for proof of your income and expenses.
3. Ignoring State Taxes
While the federal tax rules apply to everyone, each state has its own tax laws. Some states have lower thresholds for tax reporting.
For example:
- Massachusetts requires a 1099-K for earnings over $600 (not $20,000 like federal law).
- California taxes crowdfunding income just like the IRS does.
Check your state’s tax rules to avoid surprises at tax time.
To avoid these mistakes, track your earnings, report all taxable income, and consult a tax professional if you’re unsure about your tax obligations.
5 Tips to Avoid Tax Surprises
- Track Everything: Use apps like QuickBooks or a spreadsheet.
- Save 25-30% for Taxes: Always be prepared.
- Keep Business & Personal Money Separate: It makes tax time easier.
- Understand Gift Limits: Clearly explain your GoFundMe is for personal needs, not business.
- Talk to a Tax Pro: They can help you find tax deductions you might miss.
Crowdfunding taxes depend on why you are raising money. If the funds are for personal needs (like medical bills), they are usually tax-free. But if you’re running a business or offering rewards, the IRS considers it income, and you must pay taxes.
When in doubt, save receipts, track donations, and consult a tax professional. It’s better to be safe than sorry!
Got more questions? Drop them in the comments below!
