03 SEP 2024 / IRS UPDATES

Latest Updates on Crowdfunding Tax Regulations

The IRS recently released a fact sheet (FS-2024-28) addressing the tax implications of crowdfunding distributions—a hot topic for those guiding clients through this increasingly popular fundraising avenue. Here’s the key takeaway: crowdfunding income might be taxable, and distributions could trigger reporting requirements depending on the facts and circumstances. As a professional, staying ahead of these updates will help you navigate the complexities for your clients.

Crowdfunding platforms or their payment processors may need to issue Form 1099-K if distributions meet reporting thresholds. Previously, this form was only required if distributions exceeded $20,000 and involved more than 200 transactions. However, beginning in 2024, this threshold will be reduced to $5,000 as part of a phased plan under the American Rescue Plan Act (ARPA). This significant change means more clients could find themselves receiving a Form 1099-K, even if their campaigns are modest.

Points to Keep in Mind:

Understand Reporting Requirements: Form 1099-K could land in your client’s inbox if their crowdfunding campaign crosses the reporting thresholds. Ensure they’re aware that these forms might be issued by the payment processor rather than the crowdfunding platform itself.
Taxability Depends on Circumstances: Crowdfunding distributions might not always qualify as tax-free gifts. Contributions are only considered gifts if they stem from detached and disinterested generosity. Otherwise, those funds may be includable in gross income.
Proper Reporting on Tax Returns: If non-taxable distributions are reported on Form 1099-K, these should be recorded on Form 1040, Schedule 1, to reflect the adjustments accurately. Incorrect reporting can prompt IRS inquiries, so it’s crucial to document appropriately.
Maintain Comprehensive Records: Both crowdfunding organizers and recipients should keep detailed records of all transactions and distributions for at least three years. This helps ensure compliance and provides clarity if the IRS seeks further information.

By staying informed on these updates, you can better guide your clients through the complexities of crowdfunding income and reporting obligations, ensuring they’re not caught off guard when tax time rolls around.