The ins and outs of crowdfunding

Crowdfunding has become a common way to raise money. Clients use it to fund businesses, cover medical costs or support personal causes. As more taxpayers turn to online platforms, tax professionals are seeing crowdfunding activity more often on returns.

Understanding how these funds are treated for tax purposes is critical. The rules are not always intuitive and mistakes can lead to an IRS notice or unreported income issues.

Why crowdfunding matters

Crowdfunding may feel informal, but the tax treatment is not. Under the Internal Revenue Code, gross income includes all income from whatever source derived, unless a specific exclusion applies.    

This creates confusion for many taxpayers. They often assume money received through crowdfunding is tax-free. In reality, some of it may be taxable, depending on how the funds are structured and used.

Who is affected

Crowdfunding reaches a wide range of taxpayers:

• Individuals raising money for medical bills or personal emergencies (GoFundMe)  
• Small business owners launching or expanding operations (Kickstarter) 
• Content creators offering rewards or early access to products (influencers)
• Employees receiving support from coworkers or employers 

Tax professionals often identify crowdfunding during return preparation when reviewing deposits or analyzing Forms 1099-K, Payment Card and Third Party Network Transactions. 

Why tax professionals see it more often

Crowdfunding platforms and payment processors may issue Form 1099-K when reporting thresholds are met. This form reports gross payments received during the year. 

Even if the funds are not taxable, the IRS receives a copy. If the amount is not addressed on the return, it may trigger an IRS notice. This increased reporting is why crowdfunding shows up more often in practice.

What the IRS says 

The IRS does not treat all crowdfunding the same. Instead, tax treatment depends on the facts and circumstances. In general, crowdfunding proceeds are taxable unless they fall into one of these categories:

• Loans that must be repaid 
• Capital contributions in exchange for an ownership interest 
• Gifts made from detached and disinterested generosity 

If the funds do not meet one of these exceptions, they are generally included in income. A key factor is whether contributors receive something in return. If there is a benefit, such as goods, services or financial return, the payment is not considered a gift. 

How to determine tax treatment 

Each campaign should be reviewed carefully. Consider:

• Was anything promised to contributors? 
• Is the activity tied to a business or profit motive? 
• Were funds given with no expectation of return? 

For example, a business raising funds and offering products or perks will generally report taxable income. On the other hand, funds raised for personal hardship may qualify as gifts, but only if they meet strict IRS standards.

How to report crowdfunding

The distinction turns on whether the amounts are includible in gross income under §61 or excluded as gifts under §102, based on the facts and circumstances of the campaign and the contributors’ intent. 

For crowdfunding, the IRS’ position is that amounts raised are generally taxable unless they fall into one of a few recognized categories, principally a true gift, a loan with a repayment obligation or a capital contribution in exchange for an equity interest. The IRS has also said that crowdfunding proceeds generally must be included in income to the extent they are received for services rendered or from the sale of property. 

Therefore, reporting depends on the nature of the funds: 

• Business crowdfunding is typically reported on Schedule C or on the appropriate entity return.
• Payments tied to goods or services are included in gross receipts.
• Gifts are excluded from income but should be supported with documentation.
• Loans are not income, but the repayment terms should be clear.

Form 1099-K should always be reviewed and reconciled. The amount reported is gross and not necessarily taxable income.

Recordkeeping is essential 

The IRS expects complete and accurate records. Taxpayers should keep:

• Details of the crowdfunding campaign 
• Information on how funds were used 
• Documentation supporting whether funds are gifts, loans or income 

These records should generally be retained for at least three years.

Tax professionals should always pay attention 

Crowdfunding is no longer a niche issue. It appears across many client types and industries. Misunderstanding the rules can lead to underreported income or improper exclusions.

Tax professionals should ask direct questions when they see large deposits or Forms 1099-K. Identifying crowdfunding early helps ensure proper reporting and reduces the risk of IRS inquiries. Crowdfunding may be modern, but the tax treatment follows long-standing principles. Applying those rules carefully helps both the preparer and the client stay compliant.