Aside from contribution-only donations to established 501(c)(3) charities, the gift/non-gift distinction has always been rather subjective. For example, assume you give money to a children’s choir which then performs at your wedding. The financial value of that quid pro quo is subjective, at best.
Crowdfunding contributions have muddied the waters even further. Some might consider these transfers gifts, largely because the donor receives nothing in return. But that’s not a bright line, since donors can contribute money to GoFundMe and other campaigns for any purpose whatsoever.
Congress has made no laws on the subject, and the Internal Revenue Service has passed no Federal Register rules on this topic. But tax planners still have something to go on.
Legal Guidelines from the IRS
Crowdfunding transfers do not fit neatly into the gift or non-gift categories. There is normally no relationship between the donor and the donee. This issue is certainly not unique to GoFundMe receipts. Uber drivers are not really independent contractors but they are not really employees either, and the list goes on.
Ultimately, as mentioned, Congress needs to step in and pass some laws. But until then, about the only thing tax planners have to go in is Information Letter 2016-0036. The Service points out that, in U.S. tax law, “income” is defined very broadly. In fact, there is a presumption that any money a person or entity receives is “income” unless an exception applies. When it comes to crowdfunding receipts, the income exceptions are:
-
- Loans,
-
- Capital contributions, and
-
- Gifts that come from a “detached generosity” and contain no “’quid pro quo.’”
GoFundMe’s site includes a disclaimer that “most donations on GoFundMe are simply considered to be ‘personal gifts’ which are not taxed as income in the U.S.” But that declaration is hardly authoritative, and it is certainly not binding on the IRS.
Become a Certified Tax Planner! Fully immersive year-round training and guidance on how to implement sophisticated tax planning strategies. Drastically reduce your clients’ taxes and earn premium fees!
The GoFundMe Gift Exemption
If GoFundMe receipts are tax-exempt, they will almost certainly fall under the third bullet. So, this part of 2016-0036 deserves more scrutiny.
The “detached generosity” prong is a bit uncertain. GoFundMe campaigns with political overtones are a good example. In the wake of her testimony before the Senate Judiciary Committee, several crowdfunding campaigns raised over $700,000 for Justice Brett Kavanaugh accuser Dr. Christine Blasey Ford’s security expenses. According to the online funding campaigns, she had received “death threats” and “her family have [sic] had to leave their residence and arrange for private security.”
Most likely, people gave money partially out of generosity for Dr. Blasey Ford and partially out of animosity towards the other side in this controversy. Does that mixed motive defeat the gift exemption? The IRS would almost certainly say that is the case.
Then, there’s the quid pro quo prohibition. Note that this rule is different from the general quid pro quo charitable contribution rule. Typically, if a gift includes a quid pro quo, only the gift portion is tax-deductible. The Service’s example is a $100 donation and a $40 concert ticket as a thank-you gift. That donor could still claim a $60 charitable contribution deduction.
But the language in 2016-0036 is different. The letter implies that any crowdfunding quid pro quo defeats the entire gift. Assume Dr. Blasey Ford sends personal letters to donors that are suitable for framing. Does that quid pro quo make her crowdfunding receipts taxable? Arguably, it does.
GoFundMe and most other crowdfunding sites usually send 1099-Ks if the campaign raised more than $20,000 and had more than 200 donors.
The Bottom Line
If you have GoFundMe receipts, you should probably expect IRS scrutiny. That could be a tax bill and it could be a full audit. If you want to avoid that scrutiny, it’s best to report the income. Hopefully, you contact us while there is still some money left.
Some taxpayers will choose not to report the income and take on the IRS. Hopefully they understand that they have the burden of proof to establish that the GoFundMe receipts were gifts and not income. Given the guidelines discussed above, that task will be difficult, but certainly not impossible.
The economy is changing, and existing tax rules have not necessarily stayed abreast of those changes. Apply to become a Certified Tax Planner today!
