NBC are carrying a story today warning artists and entrepreneurs using Kickstarter that the IRS could be looking into the money they’ve raised through crowdfunding.

Whilst Kickstarter, IndieGoGo, and others are emphatic that what you are giving are “donations”, the IRS are taking a different view…

“The way these sites work makes it sound like: Donate to this cause, this project, this hobby…”

“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.” – Chris Barsness, a business attorney at BarthCalderon in California.

Whilst individual situations can, of course, vary, the prevailing wisdom seems to be that you have to treat your Kickstarter campaign as a business.

The Curious Business of the Potato Salad

This is a problem that Zak Danger Brown (The Pototo Salad Guy) is going to have to wrestle with. Scott Eastman of the Tax Foundation calculated a potential tax billing for Brown of $21,000. Why? Because, in Eastman’s view, what Brown received were not gifts or donations – they were sales, and therefore income.

Kickstarter’s advice on tax, although qualified by a note that they are not qualified to give tax advice seems fairly clear:

In the U.S., funds raised on Kickstarter are considered income: A creator can offset the income from their Kickstarter project with deductible expenses that are related to the project and accounted for in the same tax year. For example, if a creator receives $1,000 in funding and spends $1,000 on their project in the same tax year, then their expenses could fully offset their Kickstarter funding for federal income tax purposes.

It’s a typically laise-faire piece of advice and one that a lot of people running crowdfunding campaigns are clearly skipping over in thier rush to hit “GO” and join the crowdfunding gold rush.

Because Kickstarters funds aren’t funds – they’re INCOME.

The fundamental problem for Potato Salad Guy is that the money he received doesn’t qualify as a gift because he is offering something in return (some of the salad, a hat, or sometimes a potato salad themed haiku).

As I’ve pointed out in other articles on crowdfunding, these projects aren’t fundraising, they are selling … and it looks like the tax man agrees.

They’ll never take me alive!

And if you think your crowdfunding efforts are likely to fly under the radar of the tax man, think again. Amazon Payments and PayPal, two of the main payment gateways used by crowdfunding websites, are required to hand over details of accounts that have over $20,000 worth of transactions or generate more than 200 transactions in a single year.

This is not a tax threshold, just the threshold at which the gateways will report, as Chris Barsness goes on to explain.

“Whether or not you receive a 1099 [a US Tax Form] 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.”

“People commenting online may speculate otherwise, but no form doesn’t mean no taxes.”

Paypal address this issue in their page of guidance for crowdfunders using PayPal, going so far as to also indicate that crowdfunding efforts that offer perks and products without a “delivery disclaimer” are not actually fund-raising but are, in fact, pre-selling.

The net tightens…

I’m safe, I’m in the UK and the IRS can’t bust me

If you’re think that this doesn’t apply to you because you’re in the UK, you’re wrong. HMRC are just as likely to come after you for undeclared Kickstarter income as the IRS are.

In fact, Kickstarter are already registered for UK VAT, as this article explains. and this is something you need to be factoring into your crowdfunding calculations alongside taxes on any income/profits.

The 1 billion dollar reality

Kickstarter proudly proclaim that they have helped individuals and businesses raise over 1 billion dollars in funds. That’s a lot of money. Too much for a cash strapped government of any country to ignore. Crowdfunded money is an income, and one that the tax man is going to be looking at with ever more scrutiny.

The IRS are making a big noise about this right now and I feel it is inevitable that HMRC and others worldwide will follow.

What should we do?

Disclaimer: I am not a tax accountant. This is just my view on things.

First, you need to figure tax implications into your crowdfunding plan. Make sure you understand your expenses against your income and make sure you have documentation and receipts for everything. Make sure you understand which of your perks are subject to VAT or other sales taxes and what your total tax bill is likely to be.

Second, take your timeline into account. You are going to get all of the money up front, but you may spend it over a long period of time. This is important for tax purposes – talk to a tax accountant about how you may be able to amoratise the income over the real life span of the project.

Thirdly, make sure you keep your crowdfunded money seperate to any other endevours you have going on. If you’re already selling anything online, mixing that money with your crowdfunding money seems likely to only further muddy the waters in terms of what is income and what, if anything, is a donation or gift.

Ultimately, if your business and your future ride on the success of a Kickstarter campaign then the most important piece of advice that seems to prevail on the internet today is… get an accountant.

Who knows, maybe one would like to be a part of your crowdfunding team.