“Crowdfunding” is a popular fundraising mechanism that uses websites to solicit contributions from the general public. Individuals organize crowdfunding campaigns to benefit charities or other people, and even to benefit themselves -- typically, when an entrepreneur needs funds to start or expand a business. Occasionally, companies organize them to benefit employees.
You may think that contributions to a crowdfunding campaign are tax deductible. After all, aren’t they donations given in support of a good cause? Similarly, you may think that distributions from a crowdfunding campaign are excluded from the recipient’s gross income. After all, aren’t they gifts, freely given?
Actually, the tax treatment of crowdfunding contributions and distributions is not always so simple. For example:
The issuance of a Form 1099-K doesn’t necessarily mean that a contribution is not deductible or that a distribution is taxable. The final determination depends on the facts and circumstances, so good recordkeeping is crucial. And, if you happen to receive a Form 1099-K from a crowdfunding campaign, it’s time to call your tax professional.