Crowdfunding – Alternative Financing for Start-Ups

By Jyothi Chillara, CPA, Senior Tax Manager
ASL Emerging Business Group

Crowdfunding is a method of raising financing for projects from the public via crowdfunding platforms and social media. Some of the most common crowdfunding platforms are Kickstarter, Indiegogo and GoFundMe. According to Investopedia, Kickstarter has raised over $2 billion since 2009.

Forbes predicts that crowdfunding eventually will surpass venture capital for investing. According to Business News Daily, ““Crowdfunding is here to stay. By 2025, the global crowdfunding market potential could be between $90 billion and $96 billion,” said Bill Clerico, co-founder and CEO of WePay, citing data from the World Bank.”

There are four main types of crowdfunding:

  1. Donation-based crowdfunding – Involves raising money for personal needs, donations for charitable purposes, etc.
  2. Reward-based crowdfunding – For the amount contributed, the project owner promises something of comparable value; for example, in exchange for a contribution for an art project, the contributor gets a painting or meeting with the artist.
  3. Equity-based crowdfunding – Contributors receive an equity interest in the project, which allows the investor to share directly in the returns of the project.
  4. Debt-based crowdfunding – Peer-to-peer lending or crowd lending.

Is crowdfunding considered income for tax purposes? There are several factors to consider:

  • Is the crowdfunding activity a hobby or trade or business?
  • Is this activity a start-up business?
  • What is the accounting method and how do you determine the value for the “rewards” in reward based crowdfunding?

In addition, different tax consequences result from different types of crowdfunding, and this will be discussed in the next ASL Advisor. In the meantime, please feel free to reach out to our Emerging Business Group with any additional questions regarding crowdfunding.