IRS Determination on Crowd Funding

On June 24, 2016, the IRS released Information Letter 2016-0036 that looks at whether funds from crowd funding are considered gross income or not.


The basic analysis is under IRC 61(a), all income from whatever source derived is income, unless there is an exception to treating it as income. The IRS takes a facts and circumstances approach to crowd funding money.


There are three circumstances the IRS believes money raised in crowd funding is not considered income: 1) if the money is a loan that must be repaid (this is not really applicable to most crowd funding), 2) the money is capital contributed to an entity in exchange for an equity interest in capital (again, not really common in crowd funding) and 3) gifts made out of detached generosity and without any "quid pro quo." For the third rule, the IRS makes note that a voluntary transfer without "a quid pro quo" is not necessarily a gift for federal income tax purposes.


Clients that are raising money with crowd funding should be aware of this stance, especially if they are providing some sort of gift in exchange for the crowd funding funds.


Relevant Cites: Information Letter 20016-0036