Crowdfunding and taxes

In Information Letter 2016-0036 (6/24/16), the IRS explains general rules that might apply to someone’s receipts of funds via a crowdfunding platform. It doesn’t mention any websites, but examples of such web platforms include Kickstarter and GoFundMe. The IRS notes the broad rule of Section 61 that receipt of funds is likely to be taxable gross income. Three examples of non-taxable receipts offered by the IRS are:

a.       Loans (must be paid back)

b.      Capital contributions (equity)

c.       Gifts “made out of detached generosity and without any ‘quid pro quo.’”

Without details, the IRS also states: “However, a voluntary transfer without a “quid pro quo” is not necessarily a gift for federal income tax purposes.”

Reg. §1.451-2 on constructive receipt is also mentioned. Per the IRS: “income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. The regulation further provides that income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. However, a self-imposed restriction on the availability of income does not legally defer recognition of that income.”

The IRS also states that the particular facts and circumstances of the funding must be examined to determine the tax consequences.

The IRS also notes that a taxpayer may request a private letter ruling (PLR) on how the law applies to their particular situation.

Observations: It would be helpful if the IRS would issue a publication with an explanation of the general rules as many people generating funds from crowdfunding do not know about the tax consequences. They are likely to get a 1099-K from the crowdfunding website. The IRS should explain what the recipient should do with a 1099 that doesn’t represent taxable income. The publication should also cover the rules for the contributor of the funds. It is not unlikely that someone contributing funds for a stranger’s medical bills thinks it is a charitable contribution (even though it is likely that there was no Section 501(c)(3) entity).

The IRS should issue binding guidance on when a “gift” crowdfunding site might be taxable to the recipient even though there is no “quid pro quo.”

One example that comes to mind for me is where there is some type of relationship (other than family) between the giver and the givee.  For example, let's say a college student sets up a fund to get money to help pay tuition. Her employer contributes funds. That is not really a gift because the employer expects something from the employee/student - continued work or perhaps it is for past work.  It would be nice to see a revenue ruling from the IRS with various fact patterns and the tax treatment for both parties.  A lot of this is not new law, just new fact patterns.  

The law also needs to be changed to require the crowdfunding site to issue a 1099 regardless of the dollars involved.  Again, IRS guidance would help on what to do with the 1099, particularly if the amount received either is not income (for example, it is loan proceeds) or it is an excludable gift.

States also need to issue guidance on the state income and sales tax consequences of crowdfunding.

Also see my post of 2/14/11.

What do you think?