Crowdfunding is the act of funding a project by collecting small donations from a large number of individuals, often via the internet. GoFundMe is one of the most popular crowdfunding sites that provides a fundraising platform for just about anyone. From education campaigns to medical expenses, GoFundMe makes it easy to raise and collect funds for many causes. But like many other acts that result in free money, taxes are not often considered. Here’s a breakdown of how GoFundMe donations are taxed.
How do crowdfunding and GoFundMe work?
Crowdfunding sites, like GoFundMe, provide a way for people to solicit donations from friends, family members, and even strangers who want to support their cause. First, you’ll need to set up a campaign page with a title, description, and images or videos that explain your cause. You’ll also set a fundraising goal. Once your campaign page is set up, you can share it with others through social media, email, and other online channels. People who visit your campaign page can make donations directly through the GoFundMe platform by using their credit or debit cards, and sometimes third-party payment apps, like PayPal. Once you start receiving donations, you can withdraw the funds from your campaign, less any fees that the site charges.
Is crowdfunded money taxed?
The big question everyone wants to know is “Are these donations taxed?” Typically, donations are considered nontaxable gifts in the IRS’s eyes. However, there are a couple of exceptions that can cause the IRS to consider your crowdfunded money taxable income.
Crowdfunded money is taxable if your donors received something in return for their donations
If you offer something of value in exchange for a donation, this transaction could instead be viewed as a sale. Since profits from sales are taxed as income, the IRS would view the “donation” as taxable.
Crowdfunded money is taxable if an employer sets up the fund for their employee
In this scenario, because the fund was set up by an employer, it is considered additional income, which means it is taxed accordingly.
Crowdfunded money is taxable if someone organized the fund on behalf of someone else but does not give the funded money to them
In this scenario, the fund would be considered taxable income and would be added to the organizer’s gross income.
Of course, if you are crowdfunding for a business venture, instead of a personal cause like help with funeral expenses, the answer to this question can become very complicated. Consulting a tax professional is your best option if you are attempting to crowdfund for a business venture.
How do taxes on donations work?
What if you’re on the other side of the screen and you are the one making the donations? One key thing to remember is the IRS does not allow you to deduct crowdfunded contributions during tax time. In order to deduct donations, you have to deliver it to a qualified 501(c)3 organization. That said, most GoFundMe pages do not qualify.
However, there is one more tax obligation to keep in mind if you donate large sums of money via crowdfunding: the federal gift tax. The gift tax is a federal levy on gifts over a certain value. Gifts can include money, property, art, vehicles, and more. In 2023, the federal gift tax cap is $17,000. This means you can give a single person up to $17,000 without having to report it to the IRS. If you exceed the limit, you’ll need to file a federal gift tax return via IRS Form 709. However, just because you file this return doesn’t necessarily mean you’ll owe taxes on the gift. You technically won’t owe taxes until you’ve exhausted the lifetime exemption amount, which is $12.92 million in 2023. If and when you finally exhaust the lifetime limit, you’ll be subject to a gift tax rate from 18% to 40%, depending on how much you gifted.
Tax Help for Crowdfund Donors
The important thing to keep in mind here is that there are responsibilities on both sides of the aisle, whether you are the organizer of a crowdfunding campaign or a donor. If you are the organizer, always make sure to use the platform responsibly and transparently, providing accurate information to donors about how their contributions will be used. If you are a donor, stay below the annual gift tax limit as often as possible. When you can’t, or when you finally exhaust the lifetime limit, stay on top of all the necessary tax filings and payments. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
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