The IRS released a fact sheet discussing certain tax issues businesses may face when raising capital through crowdfunding. Regulation Crowdfunding (“Reg CF”) permits companies to raise funds through the sale of securities without having to undergo full registration of such securities with the SEC. Crypto companies selling tokens under Reg CF may raise up to $5 million in a 12-month period and potentially be subject to less burdensome SEC reporting and compliance obligations (compared to other types of securities offerings). With any securities offering, tax planning should be carefully considered. The IRS fact sheet discusses Form 1099 reporting and whether crowdfunded amounts constitute gross income.
The IRS stated that a crowdfunding website1 or payment processor may be required to report distributions of money raised on Form 1099-K. Beginning this year, a Form 1099-K requirement exists when total of all payments distributed to a person exceeds $600, regardless of the number of transactions. Prior to 2022, the threshold was an aggregate of $20,000 and greater than 200 transactions. A crowdfunding website or payment processor is not required to file Form 1099-K when the contributors to the crowdfunding campaign do not receive goods or services for their contributions.
The IRS fact sheet also discusses the tax treatment of money raised through crowdfunding. Gross income is defined to include all income from any source whatsoever, unless a specific rule exists excluding the item from gross income. If a crowdfunding organizer takes in contributions on behalf of others (e.g., establishing a GoFundMe campaign to help a friend or relative after experiencing a hardship), the organizer will not have gross income if the funds are actually distributed to the person or people for whom the money was raised. Generally, property received as a gift is not includible if the contribution was made as a result of the contributors’ detached and disinterested generosity and without the expectation of receiving anything in return.
1 Reg CF requires that issuers sell their securities through a securities intermediary, typically a crowdfunding website.
In the absence of tax planning, a crowdfunding campaign may result in the campaign organizer recognizing taxable income as a result of its capital raise. Token issuers that do not structure their tokens as debt or equity (which means that the tokens are viewed as property from a tax perspective) may end up with a significant tax bill from the sale of such tokens; while the issuance of debt or equity generally does not result in the recognition of taxable income to the issuer, sales of property are. Even if tokens are properly structured, a crowdfunder may still receive a Form 1099-K from a crowdfunding website. The receipt of a Form 1099-K does not necessarily mean the crowdfunder will have to include the amount reported on it as taxable income. Crowdfunding campaigns should seek tax planning advice prior to offering and selling tokens.