(Note: I am not an accountant, nor do I play one on TV! For complete tax advice, you will need to consult with a tax professional.)
Crowdfunding sites like Kickstarter are rapidly gaining popularity. For those unfamiliar with crowdfunding, it offers a platform for people to introduce new product ideas (along with many other fundraising goals), and then ask people to donate money in order to fund that idea. The idea is definitely free market: the popular ideas get funded; the others get left behind. Presently, you cannot sell ownership of your idea, but you can offer product discounts and other benefits to those who donate.
I was listening to a tech show last weekend, and one caller brought up a very important issue about crowdfunding: very little has come from the IRS regarding the tax consequences of money raised through these sites.
Working through the options for handling this money with the IRS, the host and the caller came to the conclusion that it would have to be treated as income. Funds raised are taxable as sales, which means that any expenses incurred in providing benefits would be deductible against the income. However, whatever is left would be treated as income.
Furthermore, the site may also be under a legal obligation to send you a 1099 for your income, which means that the IRS will be expecting you to report it. Because there will be a record that you received this income, it will be easy for the IRS to come after you if you do not report it. Even if you do not receive the 1099, the IRS could still tie you to a crowdfunding campaign through many sources and then come after you for additional taxes.
There are many tax implications for this relatively new type of funding for which the IRS has yet to offer any official guidance. Until it does, your best option is to consult with a tax professional, and you should plan to pay taxes on any income gained from crowdfunding until the IRS says otherwise.
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