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Kickstarter & Indiegogo Tax Implications

Published by Salvador Briggman. Find him on Twitter.

The implication of taxes when running a Kickstarter or Indiegogo campaign is a huge gray area for most creators. The reason the question is so difficult to answer is that depending on the your home country, state, and industry, the answers may vary enormously. In addition, how you use your Kickstarter or Indiegogo funds and what they were raised for can have a big impact on the taxes you must pay.

Please keep in mind that I am not an accountant and any of the resources I provide below should not be construed as tax advice. It’s simply meant to help you navigate the crowdfunding waters. I always recommend that if you are uncertain, you should consult an accountant. I will be primarily focusing on US tax implications.

The Funds Received

In general, the funds received on Kickstarter or Indiegogo can be classified as:

1. Income

2. A non-taxable gift

Sometimes, certain portions of your funds raised, like money in exchanged for product-tier rewards, can be classified as income, and other portions, like donations, may be classified as a non-taxable gift. Below, I’ve broken down the differences and definition between these three classifications.

What is classified as income?

taxes moneyFor most campaigns on Kickstarter, the majority of pledges will fall into this category, as the website forbids charity fundraisers. On Indiegogo, I still think the majority of pledges will fall into this category, but there are likely more that could fall into the “non-taxable gift” category.

According to CrowdfundCapitalAdvisors, “If the rewards issued are tangible and comparable to what the market price would be for that good, then it is a business transaction, and any profit derived from the sale is considered taxable income.”

This means that if you are raising money for a cool new watch and are offering the watch or accessories for the watch as perks for a price that is comparable to its retail price, then any profits made from those pledges would be considered taxable income.

If you own a registered business and are running the campaign under your business, you would file the income accordingly (LLC, Corporation, etc). If you do not own a registered business or are not running the campaign under your business, then you would likely be classified as a sole proprietor and need to pay the applicable sole proprietor federal, state, and local taxes (along with any licenses you may need to operate).

What is classified as a non-taxable gift?

presentThere are two circumstances where pledges received could be considered gifts:

1. A backer pledges and chooses not to receive a reward.

2. A backer pledges and the reward is diminutive compared to the amount given (considered a gesture of gratitude).

“For example if a funder were to donate $50 and they were to receive a mug or a calendar as a thank you, this would not count as a transaction but rather a gift.” – CrowdfundingCapitalAdvisors.

Currently federal law exempts the first $14,000 of gifts made during the course of the year to anyone other than a spouse from the federal gift tax (this amount is indexed for inflation but can only increase by $1,000 increments). – Read more.

What about sales tax?

I would highly recommend researching sales tax, in particular internet sales tax in your state. If you google “internet sales tax” the first result that comes up is a helpful 50 state guide to state sales tax laws.

As you can tell from that website, it really depends on the state you are living in. Let’s take New York for example.

“The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a ‘physical presence.’

For guidance on how physical presence, or nexus, is understood specifically under New York law, consult Section 1101(b)(8) of New York’s tax laws (N.Y. Tax Law). The section provides a relatively lengthy set of statements defining “vendor,” which is a person or other entity required to collect and pay sales tax. Several definitions of “vendor” now involve “affiliated persons.” In addition, New York’s definition of “vendor” includes:

  • a person who solicits business by distributing catalogs or advertising, “if such person has some additional connection with the state which satisfies the nexus requirement of the United States constitution,” and the person makes sales of taxable items within New York
  • a person who makes sales of taxable items and “regularly or systematically” makes deliveries of those items into New York other than by common carrier (i.e., not using U.S. Mail, UPS, Fedex, etc.)”

This interpretation is not the same for every state. You must do your research. If you have backers located in your state or elsewhere, you may need to pay sales tax! Regardless, I would highly recommend including a location field in any surveys you send out, so that you know where your backers reside.

Should I expect a 1099 Form?

If your project has raised more than $20,000 and conducted more than 200 transactions in a year, you should expect a 1099 Form from Amazon or PayPal, depending on the crowdfunding platform you go with, as both are required by the IRS to report the sales of goods and services that meet the above threshold.

PayPal has a good overview of crowdfunding practices and information that I’d recommend checking out. Amazon does also.

The Expenses For Your Campaign

As I mentioned in this article, the majority of crowdfunding campaigns on Kickstarter and Indiegogo do not turn a tremendous profit. This means that you can offset the income from the sale of goods/services via reward tiers that we talked about above with business expenses to lower your overall taxable income.

If you’re looking to get inside of the mind of a creator that has grappled with this issue, I recommend Glenn Fleishman’s article “Pay Caesar His Due.” He comes at the issue of taxes and expenses related to crowdfunding campaigns very practically.

pay his due screen shot

According to Flieshman “States that have gross business taxes, like Washington, calculate tax on the amount charged before Kickstarter’s fee and credit-card fees.” Takeaway: Research how your state calculates gross business taxes.

In addition, I think this particular segment of his story is incredible important. Listen up.

“Because crowdfunding campaigns can take months or even years to fulfill, if you launch a campaign late in a year, all the revenue comes in late in the year and is taxable in that year, whereas expenses come in the next year or even a subsequent one for big projectsSorry for all the italics, but it’s an important point to make.

You see the problem. In our case, we raised over $56,000 in 2013 (before subtracting Kickstarter and credit-card fees), and nearly all of that money was for services that would be rendered in 2014, such as printing. Because we would eventually incur those expenses, they would offset our taxable income in 2014 — but we still needed to pay the tax for 2013! That can cause a cash crunch if you haven’t planned for it.” – Read more.

Overall, I would be sure to keep an extremely detailed excel spreadsheet with all the expenses you’ve accrued related to the the campaign from the beginning to shipping out the last reward. I’d also back up these entries with receipts and any proof of purchase screenshots/PDFs that you can get your hands on to cover your bases.

Conclusion

I’d like to ask you to leave any questions you have related to crowdfunding and taxes below. I likely won’t have all the answers and any advice I give is not to be construed as legal or tax advice, but I may be able to point you in the right direction.

In conclusion, I urge you to share how you have dealt with Kickstarter or Indiegogo and taxes below. It will help guide other creators in navigating these uncharted waters.

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  • Elijah Perrenoud

    Thank you so much for this article! I am nineteen and just moved out on my own into the tax-paying world, and am simultaneous running an Indiegogo campaign. For someone that has never done his own taxes before, it is deep and troubling waters. I wasn’t exactly sure what I would have to pay for taxes or how I would mark it down. There is so much in taxes that just boggles my mind. But your article really helps – even if the government does tax my campaign as “income” it is small, so I hope everything will be alright.

    -Elijah P.

    • CrowdCrux

      Glad it’s helpful :).

  • Awesome, Salvador, top-notch. This article was immensely helpful and I think one of ( if not, ‘the’) first to address crowd funding and taxes. My KS project funded my debut children’s picture book. Unfortunately I had not planned for sales tax when setting my goal, so that will be coming out of pocket as we have used all our funds. I like how you mentioned the possible issue with end of year projects, thankfully we took this into consideration and funds came in early January –it was a close one. Although, when we posed the scenario to our CPA, he did not seem to be too concerned about the possibility of receiving and spending funds in separate tax years — according to him it happens often in business and there are ways to avoid tax confusion. Having a CPA prepare our taxes has been incredibly reassuring. Thanks again for your help. Great info… as usual.

    • CrowdCrux

      Glad you were able to take the end of the year product piece into consideration. Also glad to see you retained the services of a CPA. It’s valuable to get to know one early if you plan to be in business for a while.

  • olivier

    What are the implications of having your crowdfund money collected by a non-profit foundation? Kickstarer doesn’t allow donations. But if the business is related to a social cause, and a foundation collects the funds, would that work and be classified as tax-exempt?

    • CrowdCrux

      You can claim some Kickstarter pledges as gifts (or what might be considered donations) whether you are a nonprofit or a for profit. Regarding nonprofit income, see: http://nonprofit.about.com/od/faqsthebasics/f/allnonprofittaxex.htm You would treat the funds collected as income and depending on your status, you may or may not be liable to pay taxes. This comment does not construe legal or tax advice. I’d recommend getting a professional opinion.

  • David Delamare

    Another great article, Sal. We actually hadn’t thought about the fact that a (very small) percentage of our pledges could count as gifts. We did think about having the campaign end right after the start of the year, so we’d have the expenses and income be in the same year. One thing we didn’t factor in (not a tax issue, but a financial one) is how much time we’d be spending on the project, thus neglecting our regular income-producing activities. We doubt we’ll turn a profit on this campaign, though we raised 83k. But we’ll have a beautiful product and will have built a new community. —Wendy Ice & David Delamare

    • CrowdCrux

      Good point. Opportunity cost is another variable. For some, it can be higher than others. Thanks for sharing.

  • I found your article quite informative. I’m in the beginning stages of developing a campaign and it’s already November…the 60 day cycle will end in January however because we chose the “Flex-pay option” using Indiegogo, the issue of taxes for the previous year will have to be factored in…Thanks for the counsel and guidance…now we just need a CPA and business filings LLC, S-Corp etc…

    • CrowdCrux

      Awesome! Glad it was informative. Yea, I would definitely seek the counsel of a CPA/attorney.

  • Daniela

    Thank you for this article, Salvador. This is a subject I’ve been sweating over with the impending tax season. In our situation our biggest oversight was in not foreseeing factoring hidden fees, taxes, expenses, etc. We had several international donors, which Amazon taxes at a higher rate, and combined with other factors, we’ll be paying out of pocket for any taxes. We are lucky than many of our benefactors donated pledges without requesting a reward, so we’ll be tallying up our gift funds here before long. I suppose my biggest question is that our Kickstarter endeavor was a first-time partnership. We are not yet a registered LLC and haven’t done any business together outside of the KS campaign. How do you split shared income/expenses between two individuals for tax purposes?

    • CrowdCrux

      Yea, figuring out taxes for a crowdfunding project can be a huge headache. Well, I would consult an accountant/attorney and my comment isn’t any kind of legal or tax advice. If you are in the USA, I think by default you would be classified as two sole proprietors. Ideally, you should have had some kind of agreement, but if you don’t and are deciding now, I’d be sure to get it in writing and outline the rights also applicable to the project (trademarks, producing new copies, etc).

  • Mariana

    Hello

    My first question is can you run a crowd funding campaign if you haven’t registered your DBA yet? If not would I be taxed personally even after I complete my registration? I’m not looking to raise much just my start up cost, for a small business.

    • CrowdCrux

      This reply is not legal or tax advice. Recommend consulting an attorney. Yes, I think you can run a campaign. I think you would be taxed personally regardless in the US regardless if it’s a single member llc. Would consult an an accountant.

  • daniel

    Great article! Very interesting implications that one should definately factor into their project.

    For me personally (if you have any advice): Im setting up a project set to go very soon this late summer. I hope to raise significant funds if Im lucky. I suppose at the moment I would be a sole proprietor as I have not yet incorporated (various reasons why I havent yet). Most of my perks are merely gifts (website acknoledgements, t-shirt, etc) A few of the high end perks are visiting our operations once estalished, etc. However, given the nature of the idea we can’t really provide a product (its biotech). So I’m wondering if I need to adjust my target goal to factor in the hidden potential of taxes?

    Would forming an LLC prior/during the campaign be better or worse? I want to amke sure the funds raised are not wasted as they are indeed a gift from others nor do I want to be perosnally hit with a large tax penality when I dont have the resources to address it.

    Any advice? My campaign is very much tied to the summer season and would hate to delay unless necessary.

    Appreciate the insight and the article! cheers!

    • Jennifer CPA

      Well, an LLC is just a legal definition, not a tax one. You can file as an LLC on your personal return (Schedule C). For a different method of taxation, you would need to form an S-Corp, C-Corp or Partnership.

      It sounds like all of your rewards would qualify as income – but feel free to message me if you need more help.

      • daniel

        Thanks Jennifer.

        I will be forming the Inc (s-corp) regardless as thats what’ll need to be doing anyways, I just wasnt sure if I needed to do it before my campaign goes up (part of the funding raised would be to establish the company itself).

        I got the impression from the article that my perks would fall as gifts. Most are straight donations with no gift. Some are small gifts like shirts or balloons that are far smaller in value than the donation amount. Others are just name recognition for the donation (name on website eventually). I have some larger gifts that I really dont expect to work but just in case, where those would fund a much larger gift or even direct research (donate $2500, and I’ll sequence part of your genome).

        And those perks that do give a tangible effect back are limited. I.e. the 1st 100 people to donate $100 get say a t-shirt, the rest that donate $100 get nothing except a thank you email for instance?

        Thanks for the advice and Im all ears for any more you’re willing to share! Forgive me ignorance of taxes and business stuff, I’m a scientist and I’m learning the ropes as I go!

        Cheers!

        • Jennifer CPA

          Not a problem – that is what keeps me employed! Anytime you are exchanging money for a responsibility to perform, it’s revenue to your business. If someone simply send you money with no expectation of anything in return, then it would be a gift. Technically a donation would only apply if you have charitable tax status,

          I think in your case you would end up having both gifts and revenue – and it would be easy enough to figure out which is which. Keep track of the cost for the items you send out, since you will get to take those expenses to offset your revenue.

          As for the S-Corp status, you may want to investigate if that is really necessary, since there are additional forms you would have to file every year. There are lots of good articles on the web about whether or not you need to be an S-Corp, or of course you can always find a good accountant. I recommend people ask their friends and family who they use and if they are happy with their work – there is nothing better than a personal referal.

          Good luck!

    • CrowdCrux

      I’m not an accountant, so I would suggest consulting an accountant and a lawyer for advice on those points. Personally, I would get an LLC instead of operating as a sole proprietor if you’re going to be conducting any kind of business activity in your career/life.

  • Serge

    Great info, thanks! I really hope I’ll have to pay a lot in taxes at the end of my campaign 🙂
    https://www.kickstarter.com/projects/593083671/tubshroomtm-worlds-best-minimalist-strainer-hair-c?ref=category

    • CrowdCrux

      Haha just make sure to get your expenses in before the new year or you’re going to run into some headache.

  • Mark Peng

    I don’t have a company set up yet. Could I just do it as it and file as personal income tax and try to deduct it against the cost of making reward (it is a hardware product). Do you recommend that?

  • Roger

    My daughter (18 yoa) had an indiegogo campaign to pay for a sports prosthetic leg. She raised over $20k and had over 200 donors, so indiegogo said they will report the funds to the irs. We are having a lot of difficulty determining whether my daughter has to pay tax on the money or not. Can you help us figure that out? Thanks in advance.