The short answer is: Talk to your CPA.
The longer answer is, it would appear that Kickstarter money is taxable. If the Kickstarter money is being paid to a non-profit corporation that has received tax exempt status from the IRS (or is under an umbrella organization that allows the non-profit to raise funds on a tax-exempt basis), you know who you are and you need to talk to your non-profit accountants and lawyer to be clear on your status. (If you search for “tax” in the Kickstarter “help” section, you will find a couple references to how nonprofits can work with them.)
If you are not a non-profit, then the chances are pretty good that the money is taxable. First, Kickstarter money is typically not money given in exchange for a security, which would likely violate a number of state and federal securities laws both in the offering of the “security” and the sale of that security. (Also, no future benefit or ability to sell or transfer an interest.) Kickstarter says: “Rewards, not financial incentives. The Kickstarter economy is based on the offering of rewards – copies of the work, limited editions, fun experiences. Offering financial incentives, such as ownership, financial returns (for example, a share of profits), or repayment (loans) is prohibited.”
You may also want to ask your tax advisor whether “rewards” are actually sales subject to state or local sales tax in your state. By setting a “reward” for a specific dollar amount, particularly involving a CD or another good that would typically be subject to sales tax, the “reward” starts to look a lot like a “price”. If there is a sales tax payable, the burden would likely fall on the artist and not Kickstarter–however, the IRS or state tax authorities may decide that Kickstarter should be collecting sales tax particularly since there is probably hundreds of thousands if not millions of dollars due in sales tax because if Kickstarter projects. Also–I’m referrring to “Kickstarter”, but the same issues will probably come up in almost any “crowdfunding” situation.
But I think the Kickstarter relationship between artist and funder could be fairly described as a contract–the Kickstarter “deal” is a promise to do something if certain conditions are met. This is most likely going to be viewed as a “unilateral contract” and not as a gift. It’s also not like “panhandling” in that there seems to be a future promise to perform under a unilateral contract. So the payor says if I give you X then you will do Y. The payor also gets some “rewards” bling in most instances (which appears to be a fairly well defined fair market value (aka a price) based on the contribution level required to get the “rewards” bling). That looks taxable to me, although I’m not a tax expert.
Another question for your CPA is whether you need to pay self-employment tax on the Kickstarter revenue. I think there’s a pretty good argument that you do. There’s also possible that if you spend the entire Kickstarter payment on business expenses, you may not owe any income tax. You may, however, owe self-employment tax. This is a situation that is specific to every individual, so you need to get your own tax advice to see what your exposure might be.
If I’m correct in the analysis, not only would the Kickstarter income be taxable for the recipient, it would not be deductible for the payor. You should also take a close look at the instructions for IRS Form 1099-K which will be required starting with the 2011 tax year. I looks to me like Kickstarter (or more likely their payment processor) will need to report Kickstarter income to the IRS beginning with the 2011 tax year. Update: See this page on Amazon Payments dealing with Amazon Payments filing the IRS 1099-K for Kickstarter projects (I wonder if the “K” stands for “Kickstarter”). Looks like the IRS is paying attention.
Don’t forget—this is not legal advice, and you should not rely on it. Talk to your CPA about your own situation, but be aware that these are real issues.
The difference between tax avoidance and tax evasion is that you wear stripes for tax evasion. And I don’t mean pin stripes.
So if you are thinking about using Kickstarter (or any other crowdfunding source), make sure you talk to your tax advisor about how to deal with any tax issues that may arise. If you’re thinking of raising a sum of money because that is what you need to accomplish your project, you may need to raise more than you think depending on what your tax advisor says. (Note that this article is directed toward US taxpayers. Local tax laws may differ.)
And by the way—if you find a discussion of this issue on the Kickstarter site, please send us the link. We weren’t able to locate it.
(Hat tip to Nikki Rowling of Titan Music Group [and co-founder of Austin Music Foundation] for raising this issue)
See also When Co-Writes Go Wrong: Artist Promotional Requirements in Co-Writer or Producer Deals