Is it Required to Pay Taxes on Crowdfunded Income?

Crowdfunding, a popular method for raising funds for businesses and projects, comes with distinct tax obligations that entrepreneurs and investors must comprehend to ensure compliance with IRS rules and securities regulations.

Reward-Based Crowdfunding Tax Obligations

Funds received through reward-based crowdfunding are generally considered taxable income for the campaign creator or business. These funds represent money received in exchange for goods, services, or perks (rewards), not donations. The gross amount raised should be reported as income on your tax return, even if you must fulfill obligations like manufacturing and shipping rewards.

Crowdfunding platforms typically issue Form 1099-K if you raise over $600, reporting the payment transactions both to you and the IRS. You can deduct the direct costs of fulfilling rewards (such as production and shipping) as business expenses. Taxation can vary if the funds are considered pre-sales, deposits, or advances, and may require careful accounting to allocate costs and revenues properly.

Equity-Based Crowdfunding Tax Obligations

Equity crowdfunding involves selling shares or ownership interests in your company, so tax implications relate to securities and capital gains rather than straightforward income recognition. You must comply with SEC regulations and proper investor disclosures, which include financial reporting as prescribed by the amended Securities Act threshold raised in 2025.

For the business, the funds received from selling equity are generally not taxable income because they are capital raised, not revenue. However, eventual dividends or profit distributions will have tax consequences to shareholders. Investors who receive equity must track their cost basis in shares, and when they sell equity, they face capital gains taxes on profits depending on holding periods and rates.

Crowdfunding platforms may require submission of investor information, and businesses should maintain clear communications and reporting procedures.

Additional Considerations

Platforms comply with IRS rules by issuing Form 1099-K for payments above thresholds, which can trigger tax filing and reporting duties for campaign creators. Any donations received via donation-based crowdfunding are usually treated as personal gifts, typically not taxable to the recipient and not deductible unless given to qualified charities.

Businesses must carefully differentiate between types of crowdfunding to apply the correct tax treatment and maintain documentation for audits. It is advisable to consult tax and legal professionals familiar with crowdfunding laws to ensure full compliance.

Key Takeaways

Reward-based crowdfunding funds are taxable income subject to standard business tax rules, requiring income reporting and expense deductions.
Equity-based crowdfunding funds represent capital raising subject to SEC and capital gains tax considerations without immediate income tax for the issuer.
Meticulously record all money received from contributors.
The money raised through crowdfunding needs to be reported on Form 1099-K if the gross income raised exceeds $600.
Donors should keep records of their contributions for claiming deductions on their tax returns.
Keep detailed accounts of any goods or services provided in return for contributions.
Use records to support claims for tax exemptions or deductions.
Utilize secure channels for communicating with backers and refrain from sharing sensitive information through insecure methods.
Donations made through a crowdfunding website to a registered charity are tax-deductible.
When using crowdfunding to finance medical expenses, the donations may be considered tax-deductible.
It's important to consult with a tax professional to determine if your crowdfunding campaign qualifies for any of these exemptions.
If you incurred startup expenses for your business in a particular year, those costs may be tax-deductible.
Reward-based crowdfunding involves offering a gift or reward in return for a pledge, making the money taxable.
Contributions made to crowdfunding campaigns that directly benefit a registered nonprofit or charity may be tax-deductible for the donor.
Ensure transparency to contributors about how their funds are being used.

The gross amount raised through reward-based crowdfunding should be reported as income on your tax return, with direct costs of fulfilling rewards deducted as business expenses.
For equity-based crowdfunding, funds received from selling shares or ownership interests are generally not taxable income, but investors may face capital gains taxes upon selling the shares, depending on holding periods and rates.