Crowdfunding is becoming an increasingly popular way for businesses or individuals to raise money.  The internet and sites like Kickstarter makes it possible now to collect $5 from 5,000 people in order to raise the $25k you need in order to make a short film or design a new board game.  So what are the tax implications of this new source of funding?

In most cases it’s going to be income.  Any for-profit venture that raises capital but does not offer equity in exchange is going to need to recognize income for all the money it raises.  Many times crowdfunding includes a perk offered in exchange for the funds.  Perhaps your contribution will get you an early purchase option on the finished product.  From the IRS’ perspective, the business offering an early purchase option in exchange for your $5 contribution is revenue to the business.

If there is any good news here it is that crowdfunded projects probably won’t have net income after expenses, so an actual tax liability is unlikely.  If the project needs $25k to design and produce a new board game, the $25k collected is revenue, but if the company spends that $25k on design and production, the net income would be $0.

The one case where crowdfunding might not be taxable is if it is truly a capital contribution in exchange for equity of the business.  In that case it is similar to venture capital.  A business that needed $25k and offered 10% equity in the business, would be on track for a tax-free transaction.  They offered nothing but equity in exchange for a capital contribution, which is venture capital just on a smaller scale.

Crowdfunding and Kickstarter can be great ways to finance a new product or business line, but don’t forget about the tax consequences.  It is always better to understand them before you embark on your next project.