donate-drawings-750Is GoFundMe Tax Free?

IRS requirements are often confusing, and crowdfunding tax treatment is no exception.

GoFundMe, Kickstarter, and other personal fundraising websites have become extremely popular – their purpose being to assist in raising funds for different campaigns. You’ve probably donated to a cause or know someone who started a page to raise money to rebuild a home after a natural disaster, assist with funeral costs, or start a new business. You may have even started a campaign yourself.

You may think the money collected on these sites is tax-free. Well, that depends.

IRS GoFundMe Requirements

Crowdfunding sites, like GoFundMe, are legally required to file a Form 1099 with the IRS for campaigns that receive over $20,000 in donations or over 200 donations. This requirement has caused some confusion among individuals who start a GoFundMe account and receive donations over the $20,000 limit and has even caused confusion at the IRS.

For most people, a 1099 indicates taxable income that needs to be reported on their tax return. However, as mentioned above, donation-based crowdfunding is not taxable. The Internal Revenue Code says that gifts are not taxable income to the recipients. While you should report crowdfunding on your tax return, this does not automatically make it taxable.

Filing Form 1099 for IRS GoFundMe Donations

To eliminate some of the confusion, you should record the 1099 income on your tax return as other income. Then, on another other income line, report an offsetting reduction for the same amount. You can also add a short explanation of the reason why it is being considered nontaxable.

If you fail to correctly file your crowdfunding donations, you might experience other problems later on. Recently, the IRS sent a cancer survivor a tax notice for $19,000 related to back taxes and interest after she received a 1099 for proceeds on her GoFundMe account. The IRS claims that her proceeds should have been claimed as income.

Basically, the IRS received a copy of the 1099 showing proceeds and tried to match it up to her tax return, but she didn’t record the income on her return. Without her recording the income the way we have suggested, the IRS has no way to know that the proceeds should not be taxable.

Bank Accounts and Taxable Income

Although the money you receive from the fundraiser isn’t taxable, you could still owe taxes, depending how you held the funds. The IRS doesn’t tax beneficiaries on the money received through fundraisers. However, if you are raising the funds for someone else, you’ll want to keep the money in a separate bank account to avoid any discrepancies with the IRS. If you do not keep the funds separate, the IRS may question where the money in your account came from, especially if you get audited. As a precaution, maintain records of all fundraising deposits to show the source of the funds. If the money raised gets held in an interest-bearing account, the owner of the account is liable for any taxable interest. If you want to avoid the interest taxes, you can talk to the bank about setting up a non-interest bearing bank account.

Taxable Income

When a contributor receives something of value, the contribution becomes taxable income. Typically, a campaign sets minimum donations to receive a first-run product or a gift certificate valid when the product launches. In those cases, the crowdfunding contribution is technically no different than a sale in an online store or at the cash register.

Crowdfunding has been an effective tool for raising money, but before you decide to open that Crowdfunding account, it’s wise to consult a tax professional.

Steven Z. Freeman, CPA, and the FREEMAN & ASSOCIATES team, provides Tax Preparation services and can assist you with any actual calculations on your Tax Returns. If you have any questions on this matter or to schedule a complimentary initial consultation, please contact us at (805) 495-4211

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