Do you run crowdfunding campaigns to enable your business ventures and entrepreneurial dreams? With the new 1099-K rule, crowdfunding might just come with tax complications
What is crowdfunding?
Crowdfunding is a funding process where individuals can contribute variable amounts of money with no fixed threshold for a cause or an entrepreneurial purpose they believe in. If you own a startup that needs funds for a marketing campaign, crowdfunding is one way to go.
Alternatively, if you’re just starting out and need funds to launch your business, crowdfunding can be a great tool to raise funds for your entrepreneurial dream.
Either way, a crowdfunding campaign’s main purpose is to fund your cause through multiple individual sources that are willing to donate through a common medium – the crowdfunding app or platform.
Most donors also enjoy a tax deduction on select crowdfunding campaigns (especially if the cause is a charitable one).
Crowdfunding is a very broad term, and the individual use cases of the campaign influence whether the fund generated is taxable.
According to the IRS, if a business or a person raises funds through a crowdfunding app or website, and the payee is under no legal obligation for repayment, then such funds are considered income. The payee will be taxed for the same.
What’s the new 1099-K rule?
Crowdfunding apps and websites are usually required to file a 1099-K if the gross total of the “payments” processed is more than $20,000 and if the total number of transactions is 200 or more.
However, this rule is no longer applicable for calendar years after 2021.
The IRS instructs taxpayers to file a Form 1099-K if the gross total of the reportable third-party payment transactions is $600 or more, with no limitations or reservations on the number of transactions.
This is the current 1099-K reporting regime that all third-party entities, which includes crowdfunding entities, must also follow to comply.
If the total reportable funds distributed to the business is over $600, then the crowdfunding entity needs to file a 1099-K form.
How does the new $600 rule impact crowdfunding?
Previously, the crowdfunding apps or entities didn’t need to worry about reporting with Form 1099-K unless the reportable payments threshold exceeded $20,000 with the prequalification of 200 transactions.
This quickly changes with the current 1099-K reporting regime.
Not only do crowdfunding apps need to file a 1099-K form for each payee to whom they’ve “paid” $600 or more, but the payee is also subject to pay the tax on the “income” received.
Technically, funds raised for a personal cause or a business cause through a third-party app is income and the IRS requires the payee to oblige with the voluntary compliance program and pay the taxes.
The purpose of the crowdfunding campaign, repayment obligations, and the nature of the payment are all considered when determining if the fund received is subject to federal tax.
For example, if you receive the funds to raise “capital” for your business, or if you’ve received the funds as “gifts”, or if you’ve received funds as “loans”, then such funds are obviously excluded from taxes.
What your app-based crowdfunding entity can do to comply?
Managing a crowdfunding entity is not easy.
With the new 1099-K rules in action, you will need advanced tax compliance and regulatory reporting solutions to prepare and file 1099-K forms.
Onboard customers confidently, verify their identities in real-time and report the funds distributed through your crowdfunding app on Form 1099-K with Tax1099.
Get Tax1099 For Your Business
Tax1099 is an IRS-authorized eFile provider, trusted by 200,000+ businesses across the U.S.
Simplified payee onboarding process with KYC/AML-centric identity checks
Electronic W-9 solicitation for easier payee TIN obtainment
Real-time TIN Matching for easier payee verification
Easier data management with 12+ top-rated integrations
Bulk eFiling for 1099 and other IRS form series
API for automated 1099-K management
Scheduled eFiling to prevent late filing penalties
And so much more.
Get a Free Demo (or) Sign Up For Free
Other Useful Reads From Tax1099 Blog
- Virtual Transactions Also Have Tax Consequences
- How The New 1099-K Filing Rule Is Adversely Impacting Small Business Owners
- Using Peer-To-Peer Payment Apps To Accept Payments From Customers? Here’s How It Impacts Your Business Tax Information Reporting
- How To Use Form 1099-K For Your eCommerce Business
- PayPal, Venmo & Cash App Must Report Transactions Of $600 Or More To IRS
- Are Venmo Payments Considered Income? Get All The Details Here
- e-Commerce & Online Businesses: Here’s How Form 1099-K Impacts Your Business Tax Information Reporting
- 5 Form 1099-K Myths You Probably Believe That Aren’t True
- 1099 Reporting & Client Due Diligence Made Easy For Crypto Exchanges With Tax1099
- Due Diligence For Businesses That Work With Gig Economy