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This article is reprinted by permission from NerdWallet.
Crowdfunding organizations, such as GoFundMe, have made it easier than ever to raise and collect funds for personal causes.
If you found yourself at the helm of a campaign last year, or if you set up a fundraiser for another person, chances are that meeting your donation goal was top of mind. But there are also some important tax considerations to be aware of as you prepare to file.
The nature of your campaign and how you go about collecting funds play a big role in whether the IRS will deem the money you raised to be taxable. So, if you want to avoid a headache at tax time, knowing the rules helps.
Is crowdfunded money taxed?
Donations can be considered nontaxable gifts for tax purposes, according to the IRS. However, you may have to pay taxes on money raised in a crowdfunding campaign for a few reasons:
- If donors receive something of value in return for their contribution, the IRS could consider the donation a sale, which would mean any profits could be taxed as personal income.
- If an employer donates to a crowdfunding campaign set up to benefit someone who works for them, the contributions probably will not be considered a gift and should be added to the recipient’s gross income.
The same rules are in effect for funds you set up on behalf of another person, as long as the money was given to them as promised.
If you’re raising money for a business venture, things can quickly get more complicated, so it might be a good idea to work with a tax professional if you have any doubts about the taxability of your fundraiser.
Plus: GoFundMe fundraisers for college tuition are up by more than 50% over last year
Is GoFundMe tax-deductible?
On the other side of the aisle, people who donate to crowdfunding campaigns may be wondering if their generosity could score them a tax deduction. The answer? Typically not.
That’s because the IRS has strict rules about what kind of donations merit a tax deduction.
To snag a tax break for giving, the agency requires that your donation be delivered to a qualified 501(c)3 tax-exempt organization. If you have questions about the tax deductibility of a donation, the IRS also has a handy tool that can help you quickly search for and locate eligible organizations.
Some crowdfunding websites also make it easier to distinguish between a personal campaign and fundraisers run by 501(c)3 organizations. GoFundMe, for example, has a separate landing page for campaigns run by charitable organizations, and Kickstarter encourages donors to reach out to project creators directly to confirm whether a donation is tax-deductible.
Also see: The IRS audits Black taxpayers at far higher rates, study says
Do I need to pay gift taxes on the money I donate?
If you donated over $16,000 in 2022 (or $17,000 in 2023) to a crowdfunding campaign not run by a qualifying charity, be aware that you may be on the hook for filing a federal gift tax return. This doesn’t mean you’ll owe the federal gift tax — few people actually end up paying gift taxes — but you may need to report your generosity to the IRS come tax time.
Also see: Dear Tax Guy: Our accountant charged $486 for a simple gift-tax return. Why would it cost so much?
What crowdfunding tax documents do I need?
If your crowdfunding campaign raised more than $600, and if contributors received anything in return for their donation, the fundraising platform will probably send you a tax statement called a 1099-K form that outlines exactly how much money you netted. Remember that you’re not the only recipient of this form — the IRS gets a copy, too — so that should be enough to wash away any thoughts of not reporting the income when you file your taxes.
As with all things tax, it’s essential to keep good records and receipts. Documentation can provide proof to the IRS about the taxability of your campaign and money earned through it.
The agency urges anyone who sets up or runs a fundraising campaign via crowdfunding to keep a paper trail of the campaign and how the funds were dispersed for at least three years. And if you have questions about a campaign’s tax implications, it’s never a bad idea to call in a tax professional for a second opinion.
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Sabrina Parys writes for NerdWallet. Email: sparys@nerdwallet.com.
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