North Carolina Law Review

University of North Carolina School of Law

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The Tax Implications of Crowdfunding: From Income to Deductions

March 25, 2019

97 N.C. L. REV. 710 (2019)

 

Over the past few years there have been countless crowdfunding success stories. Perhaps one of the most notable occurred during the fall of 2017 when NFL star J.J. Watt raised over $37 million to aid those affected by Hurricane Harvey. He accomplished this feat through YouCaring, a crowdfunding website. Over 200,000 people gave money via the YouCaring page. Crowdfunding, however, is used not only by celebrities but also by everyday people to raise money for their various causes or products. For example, another success story occurred in the fall of 2016 when Khaled Majouji set up a crowdfunding page through GoFundMe, another crowdfunding website, to raise money for his new business that revolves around an emerging farming technique. Majouji raised over $230,000 through his efforts. Additionally, a crowdfunding page was recently set up for a man named Scott Lamaster through GoFundMe to raise $15,000 for medical bills related to a propane grill accident. These are just some of the many crowdfunding attempts made in recent years. 

  

Accompanied by a long list of concerns surrounding crowdfunding, two basic tax issues remain unanswered. First, is the money raised by J.J. Watt, Khaled Majouji, and Scott Lamaster subject to federal taxation? Second, if that money is later contributed to a charity, used for medical expenses, or used for an ordinary and necessary business expense, is the taxpayer allowed to take a tax deduction?

 

Neither the Internal Revenue Code (the “Code”) nor the Internal Revenue Service (“IRS”) has directly addressed these issues. In fact, “[n]o court cases, regulations, or revenue rulings directly address the issue of crowdfunding contributions as gross income.” The only guidance the IRS has provided is a nonbinding information letter that simply draws attention to the longstanding principles of tax law. This lack of guidance means that taxpayers must rely on general tax principles to determine whether the money raised through crowdfunding is subject to federal taxation. 

 

In addition to the lack of guidance on the receiving end of contributions from crowdfunding, even less guidance exists on the subsequent expensing of those same contributions. Can taxpayers who raise money through donations-based crowdfunding take a charitable deduction once that money is donated? Can those same taxpayers take a medical expense deduction or a business deduction?

 

This Recent Development analyzes these two broad tax issues. Part I generally describes the four different types of crowdfunding. Part II analyzes whether money raised through rewards-based crowdfunding and donations-based crowdfunding are subject to federal taxation. Finally, Part III analyzes whether money raised through donations-based crowdfunding can subsequently be deducted, lowering a taxpayer’s liability further.

 

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