Crowdfunding sites like Kickstarter can be an easy way for artists and entrepreneurs to raise money -- but they may be surprised to find the IRS likely sees the funds raised for their passion projects as taxable income.
Users of Kickstarter, Indiegogo, GoFundMe, and their host of rivals may see themselves as hobbyists or the recipients of donations. But tax experts caution that if they're offering products or services in exchange for money, that's generally considered income.
"The way these sites work makes it sound like: Donate to this cause, this project, this hobby," said Chris Barsness, a business attorney at BarthCalderon in California. "It sounds innocuous, like nothing tax-related would come up. But any time money changes hands, the IRS is going to find a way to tax somebody."
Individual situations can vary, pointed out M.J. Bogatin, a lawyer at Bogatin, Corman & Gold who works with startups and artists near San Francisco.
"But as a rule of thumb I tell clients: Treat it like a business, the end," Bogatin said.
However, that's not typically how artists and entrepreneurs view their crowdfunding endeavors.
Lainey Schooltree (a stage name) -- a producer and performer whose art-rock band Schooltree raised $9,000 on Kickstarter in 2012 to complete its debut album -- told NBC News that taxes never entered her mind until she saw a mention of a tax form during the Kickstarter signup process.
"I frantically Googled 'Kickstarter taxes, but there wasn't a lot of clear-cut information," said Schooltree, whose real name is Lainey Schulbaum. "I found a lot of 'you can try this or that, but there's no guarantee.' There was no precedent or straight answer."
As Schooltree found, even those who are savvy enough to look for guidance on taxes won't find instructions from the IRS about crowdfunding explicitly. The IRS declined to comment on this story.
"As a rule of thumb I tell clients: Treat it like a business, the end."
A confused Schooltree published a post on her blog about what she learned, in which she pointed out sites like Kickstarter, GoFundMe and more share little guidance about taxes.
That's likely why a few pervasive myths and speculative theories continue to fly online between befuddled artists who have raised funds through crowdfunding.
Generally, crowdfunding sites shy away from providing any back-end services would that require them to get involved in tax situations. Instead they use services like Amazon Payments and PayPal to process the payments, and those processors are responsible for reporting to the IRS.
Those services are required to send tax forms to the recipient of the money -- and to the IRS -- only if that person or company raised at least $20,000 and received 200 or more transactions in a year.
That has led to online chatter about whether someone who doesn't meet that threshold, and therefore doesn't receive a form, still needs to pay taxes.
That one's easy, Barness said: whether or not you receive a 1099 doesn't change the fact that you earned money and therefore owe federal income tax. (It's possible that self-employment tax, state tax and other situations may also apply.)
"It's the same as if you did $1,000 worth of work as a contractor, and the company didn't send you a 1099," Barsness said. "People commenting online may speculate otherwise, but no form doesn't mean no taxes."
"I found a lot of 'you can try this or that, but there's no guarantee.' There was no precedent or straight answer."
The exception to the crowdfunding rule is a true gift: money sent for nothing in exchange. Some crowdfunding campaigns are meant to help a family rebuild after a fire, for example, or to raise funds for an individual's medical treatments.
"A gift, which is something of pure donative intent from the giver, should not be considered income to the recipient," said Jordon Rosen, a certified public accountant at the Delaware based firm Belfint, Lyons & Shuman. (Individual people can give up to $14,000 per year or $5.3 million in a lifetime without triggering gift tax, he added.)
But that gift rule wasn't so black-and-white for the family of Jay Lake, a science-fiction author who has battled advanced colorectal cancer since being diagnosed in 2008.
Thanks to his fans and the aid of friends like novelist Neil Gaiman, the author managed to raise $48,000 via Youfunding.com last year for an experimental genome-sequencing process to aid his treatment. Lake is currently in the middle of an intensive course of treatment at the National Cancer Institute in Maryland, said his father, Joe Lake, Sr.
According to Joe Lake, an accountant told Jay that he should not expect PayPal -- which processes payments for Youcaring.com campaigns -- to report the funds raised for his treatment.
Instead, according to Joe, Jay received a 1099-K form from PayPal that listed the gifts as income. Further complicating the issue: PayPal included the gifts on the same 1099-K form that reported Jay's royalty income for books sold overseas, which is paid into the same account.
PayPal did not reply to requests for comment, but late Thursday the company posted general guidelines for using its platform for crowdfunding.
"The fact that the donations were even reported blew us away completely," said Joe Lake. "For them to be mixed with actual business income is a whole other kettle of fish."
Jay's accountant has not yet submitted his tax returns, but according to Joe, she is planning to report only the royalties as income -- but she has told the Lakes that Jay will likely face an audit.
"We don't know how it will play out, but I can tell you we really don't need to be worried about a tax audit at a moment like this in Jay's treatment," Joe Lake said.
The Lakes were likely smart to hire a professional for their complex situation, but Schooltree, the art-rock bandleader, told NBC News she figured out her tax forms on her own. The band's album-making costs more than offset the income they raked in from Kickstarter, she said.
"I definitely stressed about it," Schooltree said. "Taxes aren't exactly fun for anyone at any time, but when it came to Kickstarter, going into it I just didn't think about taxes at all."
First published March 14 2014, 11:44 AM