Crowdfunding is the act of funding a project by collecting small donations from a large number of individuals, often via the internet. GoFundMe has become a powerful platform for individuals and organizations to raise funds for various causes. These range from medical expenses and emergency relief to community projects and personal aspirations. However, many users of the platform often wonder about the tax implications of crowdfunding. Do you have to pay taxes on GoFundMe donations? Are GoFundMe donations tax-deductible? This article explores these questions, offering a comprehensive guide on the relationship between GoFundMe and taxes.
How Does GoFundMe Work?
Crowdfunding sites, like GoFundMe, provide a way for people to solicit donations from friends, family members, and even strangers who want to support their cause. First, you’ll need to set up a campaign page with a title and description of your cause. You’ll also set a fundraising goal. Once your page is set up, you can share it with others through social media, email, and other channels. People who visit your campaign page can make donations directly through the GoFundMe platform. They do this by using their credit or debit cards, and sometimes third-party payment apps, like PayPal. Once you start receiving donations, you can withdraw the funds from your campaign, less any fees that the site charges.
Are Donations Received Through GoFundMe Taxable?
The big question everyone wants to know is “Are donations received through GoFundMe taxed?” Typically, donations are considered nontaxable gifts in the IRS’s eyes. However, there are a couple of exceptions that can cause the IRS to consider your crowdfunded money taxable income.
Crowdfunded money is taxable if your donors received something in return for their donations
If you offer something of value in exchange for a donation, this transaction could instead be viewed as a sale. Since profits from sales are taxed as income, the IRS would view the “donation” as taxable.
Crowdfunded money is taxable if an employer sets up the fund for their employee
In this scenario, because the fund was set up by an employer, it is considered additional income. This basically means it is taxed accordingly.
Crowdfunded money is taxable if someone organized the fund on behalf of someone else but does not give the funded money to them
In this scenario, the fund would be considered taxable income and would be added to the organizer’s gross income.
If you‘re crowdfunding for a business venture, instead of a personal cause, taxability can become very complicated. In general, when a GoFundMe campaign is created to fund a business or profit-generating activity, the money received may be considered taxable income by the IRS. If, for example, a person sets up a GoFundMe campaign to raise money for a business startup, the funds may be subject to income tax as they can be seen as an investment or capital contribution. Consulting a tax professional is your best option if you are attempting to crowdfund for a business venture.
Are GoFundMe Donations Tax-Deductible?
What if you’re on the other side of the screen and you are the one making the donations? One key thing to remember is the IRS does not allow you to deduct crowdfunded contributions during tax time. If you’re donating to a friend, family member, or a cause that supports an individual’s personal needs, you cannot claim a tax deduction for your contribution. That said, most GoFundMe pages do not qualify. Some GoFundMe campaigns are set up to benefit nonprofit organizations or charities. In these cases, donations may be tax-deductible if the organization is a registered 501(c)(3) organization. Before making a donation, it’s crucial to verify whether the recipient organization has tax-exempt status under the IRS rules. GoFundMe offers an option to donate directly to verified charities. However, donors should always ensure they keep records of their contributions to claim any potential tax deduction.
Gift Taxes
There are other tax obligations to keep in mind if you donate large sums of money. That is the federal gift tax. The gift tax is a federal levy on gifts over a certain value. Gifts can include money, property, art, vehicles, and more. In 2024, the federal gift tax exclusion cap is $18,000. This means you can give a single person up to $18,000 without having to report it to the IRS.
If you exceed the annual limit, you’ll need to file a federal gift tax return via IRS Form 709. However, just because you file this return doesn’t necessarily mean you’ll owe taxes on the gift. You technically won’t owe taxes until you’ve exhausted the lifetime exemption amount, which is $13.61 million in 2024. If you finally exhaust the lifetime limit, you’ll be subject to a gift tax rate from 18% to 40%, depending on how much you gifted.
Record-Keeping for Donors and Recipients
Both GoFundMe donors and recipients should keep detailed records of their contributions and receipts. Donors will need documentation to claim a tax deduction if they’re donating to a qualified charity. Likewise, recipients should maintain accurate records of the funds they receive. This is particularly true if they’re unsure about the tax treatment of their campaign. The IRS may ask for documentation if it needs to verify whether the funds raised are gifts or taxable income. GoFundMe provides receipts to donors for their contributions. However, it’s still wise to consult with a tax advisor to ensure that any claims are handled properly.
Tax Help for GoFundMe Users
The important thing to keep in mind here is that there are responsibilities on both sides of the aisle, whether you are the organizer of a crowdfunding campaign or a donor. If you are the organizer, always make sure to use the platform responsibly and transparently. Provide accurate information to donors about how their contributions will be used. If you are a donor, stay below the annual gift tax limit as often as possible. When you can’t, or when you finally exhaust the lifetime limit, make all the necessary tax filings and payments. Keeping accurate records, verifying the tax-exempt status of charitable organizations, and consulting with a tax professional are key steps in ensuring that both donors and recipients stay compliant with IRS regulations. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.
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