Written by Annette Nellen | Posted in 1099 • Crowdfunding • IRS

In Information Letter 2016-0036, released June 24, the IRS explains general rules that might apply to someone’s receipts of funds via a crowdfunding platform. It doesn’t mention any websites, but examples include Kickstarter and GoFundMe. The IRS notes the broad rule of Section 61 that receipt of funds is likely to be taxable gross income.

Three examples of non-taxable receipts offered by the IRS are:

Loans (must be paid back)
Capital contributions (equity)
Gifts “made out of detached generosity and without any ‘quid pro quo.’”

Without details, the IRS also states: “However, a voluntary transfer without a ‘quid pro quo’ is not necessarily a gift for federal income tax purposes.”

Reg. §1.451-2 on constructive receipt is also mentioned. Per the IRS: “Income although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. The regulation further provides that income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions. However, a self-imposed restriction on the availability of income does not legally defer recognition of that income.”

The IRS also states that the particular facts and circumstances of the funding must be examined to determine the tax consequences.

The IRS also notes that a taxpayer may request a private letter ruling (PLR) on how the law applies to their particular situation.

Observations

It would be helpful if the IRS would issue a publication with an explanation of the general rules as many people generating funds from crowdfunding do not know about the tax consequences. They are likely to get a 1099-K from the crowdfunding website. The IRS should explain what the recipient should do with a 1099 that doesn’t represent taxable income. The publication should also cover the rules for the contributor of the funds. It is not unlikely that someone contributing funds for a stranger’s medical bills thinks it is a charitable contribution (even though it is likely that there was no Section 501(c)(3) entity).

The IRS should issue binding guidance on when a “gift” crowdfunding site might be taxable to the recipient even though there is no “quid pro quo.”

States also need to issue guidance on the state income and sales tax consequences of crowdfunding.

(Information Letter 2016-0036; Also, see a previous post on the issues with wanting to pay more in charitable contributions)

What do you think?

Annette Nellen

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.