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?
For 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?
There 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.
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 projects. Sorry 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.
