The Tax Status of Crowdfunding Receipts: Are They Gifts?
A cancer survivor from Nebraska was sure that her GoFundMe receipts were non-reportable gifts. After all, they were (at least mostly) for her medical bills. But then she got a $19,000 tax bill in the mail, and everything changed.
In March 2013, Casey Charf was in a rather serious car wreck. As they treated her injuries, doctors discovered several malignant tumors in her body. The good news is that cancer has much higher survival rates today than it had in the 1990s. The bad news is that cancer treatment medical bills have increased commensurately. So, Ms. Charf’s sister set up a GoFundMe page which soon raised $50,000. Roughly a year later, the IRS sent Ms. Charf a bill for $15,457 in back taxes and $3,676 in penalties and interest. “We’ve already used that money for my doctors’ bills and everything that I’ve needed,” she lamented. “It’s donations; it’s not income. So how can they tax you on that?”
A useless disclaimer on the GoFundMe website says that receipts are generally non-taxable gifts and that recipients should contact tax professionals.
The GoFundMe Gift Rule
Ms. Charf’s comments illustrate the problem with crowdfunding receipt classifications. She used the money mostly for medical bills but also for “everything [else] that I’ve needed.” That’s a very broad category which could include some arguably non-gift items, like a new car to get back and forth from the doctor’s office.
She’s correct that GoFundMe contributions are donations. The givers expect no material return. But there’s a difference between donations and gifts.
Concern over this problem prompted the IRS to release Information Letter 2016-0036. According to this letter, crowdfunding receipts are non-reportable gifts only if:
“Detached generosity” motivated the contributions, and
The donors received no quid pro quo.
Under the Internal Revenue Code, all money received is presumptively reportable income. The taxpayer has the burden of proof to show that the receipt is a non-reportable gift.
Ms. Charf’s crowdfunding receipts appear to pass muster under the first prong. Contributions towards medical bills almost certainly qualify as detached generosity. But what about other types of crowdfunding campaigns, specifically those with political or social overtones?
The CrowdPac campaign regarding Maine Senator Susan Collins is a good example. Donors have contributed over $3 million to this fund because Senator Collins voted to confirm Justice Brett Kavanaugh. The money will go to her opponent in the next election. These donations had nothing to do with generosity for her anonymous opponent and everything to do with animosity toward Sen. Collins.
The same could be said for crowdfunding campaigns which go to pay legal expenses for prominent people in legal trouble. So, there is no bright line. The determination must be case-by-case.
Ms. Charf may also be okay under the second prong. Her crowdfunding donors received no quid pro quo. Curiously, 2016-0036 seems to say that any quid pro quo defeats the gift status. To return to the previous example, if Sen. Collins’ opponent sends donors campaign buttons, the money in the crowdfunding account is arguably taxable.
But Ms. Charf may not be in the clear yet. As mentioned, she may have used the crowdfunding money on items other than medical bills. If that’s the case, the IRS could use the f-word (fraud) to invalidate the otherwise legitimate donation/gift arrangement.
The Tax Court has yet to rule in this case, and it will be very interesting to see how that ruling comes out. For now, if your clients ask about crowdfunding receipts, use caution. Inform them that these receipts are presumptively taxable income, but that an exception may apply. Generally, if the campaign had more than 200 donors and raised more than $20,000, the beneficiary will receive a 1099-K.
Contact us for more answers to your income tax questions.