Crowdfunded Entrepreneurs Run Into Tax Problems


Crowdfunding, the practice of funding a business or project with many small online contributions, has ushered in a new type of business owner and some 21 st century tax problems. Not only is doing taxes for a crowdfunded project complicated, there are some gray areas that even the IRS doesn’t have a firm stance on yet.

Jenny Wecker, a fledgling Salt Lake City entrepreneur, had a hit on her hands at the end of December: She collected $42,000 in pledges from the crowdfunding site Kickstarter for more than 300 orders of a stylish diaper bag she had designed.

The project came together in a whirlwind after her husband persuaded her to test a broader market for the bags, which she had been making by hand and marketing on Instagram.

“We didn’t even think twice about how the taxes would affect us,” she said.

But with tax preparation time in full swing, thousands of people like Ms. Wecker who ran successful crowdfunding campaigns last year no longer have the luxury of ignoring the tax consequences of their efforts. In the eyes of the Internal Revenue Service, they are small-business owners — and come April 15, the taxman wants his share of their proceeds.

Sites like Kickstarter and Indiegogo make it fairly easy for creative entrepreneurs to propose new ventures and, if the ideas appeal to a big enough audience, attract capital to finance them. But once the cash changes hands, those who may never have run a business before are thrown straight into the weeds of operating one.

The tax issues can be complex, and as the deadline approaches, terror and confusion reign.

“People come to me after they get a 1099-K, usually in a panic reaction,” said Abraham Finberg, a tax accountant in Los Angeles.

The form he refers to is the one that tips the I.R.S. off to crowdfunding campaigns. Introduced three years ago, the document is intended to help tax authorities track the kind of online sales that small businesses often do not report. Companies like Amazon, PayPal and Stripe that process payments for crowdfunding sites are required to send the form to any customer for whom they register 200 annual transactions totaling at least $20,000. (Only 15 percent of the 22,252 projects financed on Kickstarter last year passed that threshold. Smaller projects are still taxable, but they create less of a paper trail for tax authorities to follow.)

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