Crowdfunding Taxes: What Founders Need to Know

When you start a project on Kickstarter and Indiegogo there are a LOT of things to take care of.

It's easy to get confused and not knowing where to start: logistics, marketing, prototyping etc.

Among all of these stuff one question comes to mind: since I'm actually selling a product, do I need to pay taxes?

I know what you're thinking, more taxes to pay? Well, yes.

Now let's see what are the requirements to file taxes for your crowdfunding on Kickstarter and Indiegogo and why they're necessary!

Before reading the article...

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PAYING TAXES ON CROWDFUNDING

We know that there are 3 different types of crowdfunding:

1) Donation-based crowdfunding

Usually, donation crowdfunding is used to support social, personal causes or non-profit organizations, it doesn’t involve a reward just because the mere purpose of this crowdfunding is supporting the subject and participating in the project. 

2) Equity crowdfunding 

So if we’re talking about crowdfunding campaigns, what’s equity’s got to do with it? 

Equity crowdfunding owners are going to give their backers some actual shares of their company, so you will hold a piece of that specific company. Why? The main reason is because you find the product offered pretty interesting and you trust into a big company's growth.

3) Reward-based crowdfunding

In this type of crowdfunding basically, the backers are going to get a reward back, in exchange for their economic support to your campaign. The rewards usually are related to the main subject of the campaign, for example, if you back a campaign for a video-game you’ll most probably get the latest release of the game, when it will be ready. 

Whether you're conducting one of these 3 types of crowdfunding the question is: do I need to pay taxes?

Actually, the tax situation changes for each one crowdfunding. Let's see them.

1) Donations crowdfunding are made to a good cause, usually to a charity or non-profit. Nothing is exchanged, so these donations are viewed as gifts, not taxable income. This means donation crowdfunding doesn’t incur crowdfunding taxes.

2) Equity crowdfunding is exempt from crowdfunding taxes. However, you as campaign creator must pay capital gains tax on any profits from the sale of products or services.

3) Reward-based crowdfunding has born as an instrument to support a creator or a project, without necessarily wanting something in return. But it actually turned out to be a marketing strategy, where people back the project because they believe in the product and they want to purchase it. So, since we're talking about an actual purchasing process it's clear that you will have to pay taxes for it.

CROWDFUNDING PLATFORMS TAXES

Depending on the crowdfunding platform you will use there are different taxes procedures.

Kickstarter states that funds raised on Kickstarter are generally subject to taxes. How much you owe can vary based on a number of factors, including the deduction of project-related expenses. Of course, you will need to talk to an accountant or tax advisor.

Indiegogo states that if your campaign has raised at least $20,000 and has at least 200 backers (starting January 1, 2022 the new threshold is $600 or more), you will receive a notice that you are required to fill out additional information for a tax form.

Of course, taxes are due as specified by the federal government and your operating state.

In the US, If you reach a certain threshold you will receive a Form 1099-K from the crowdfunding platform. This form summarizes your taxable income and reflects your total contributions to determine what you owe in federal taxes. The crowdfunding platform also sends a copy of your 1099-K to the internal revenue service.

But, not all crowdfunding campaigns will receive this form, you’ll only receive it if you raised over $20,000 in a calendar year or received over 200 contributions in a calendar year.

If you didn’t meet the thresholds you won’t receive a Form 1099-K, and you will calculate your federal taxes by yourself. To do this, refer to your payments processing application for records of all taxable contributions from the previous year. Meanwhile, if you owe state income taxes or sales tax, you’ll need to refer to your records of contributions.

DEDUCT YOUR TAXES

Since crowdfunding campaigns are a business, you can deduct operating expenses from profits before paying taxes. Make sure to keep all your receipts for business-related purchases to show to the IRS.

Familiarize yourself with the typical business deductions. Additionally, you can get a tax break on certain expenses, for example:

Anything you spend money on to develop or improve your product, costs related to filing a patent, making models, or fabricating your invention are a write-off.

Also, market surveys, advertising, legal services, employee training, and other professional services before you open the campaign. Most expenses paid before the first day of your campaign launch are considered start-up expenses, up to $5,000 in the first year.

WRAPPING IT UP

Now you should have a general idea about crowdfunding taxes. As we've already said you should pay taxes especially if you're running reward-based crowdfunding.

Of course, these are just some basic information, taxes and forms will depend on your country and you should always contact a tax consultant before paying them.

Step by step you will learn all the tiny parts of the creation of your crowdfunding campaign, I will lead you through this path making your business project easier!

A crowdfunding launch requires a lot of hard work and sacrifices, but I'm sure that it will be worth it in order to start making your dream project come true.

Always remember that before launching your project you will need to analyze and prepare your pre-launch phase to launch your first product, I’ve got you covered with my crowdfunding pre-launch free e-book called ''3 steps to success on Kickstarter and Indiegogo''. 

As always make sure to subscribe to my channel to stay updated on fresh new content that I’m gonna drop there.

Ciao ciao! 

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