Tax Law and News

Crowdfunding 101: Is it Deductible?

Written by Jeff Wilson, CPA/PFS, CGMA, CFE, CDFA
Published Feb 5, 2018
2 min read

Crowdfunding is good for our clients who want to raise funds for a particular project, invention or venture. What makes crowdfunding so unique is that it is traditionally used to raise “material” amounts of capital that a client or organization would otherwise be required to register with the SEC, and go through costly compliance and unbearable paperwork.

Crowdfunding is executed through website platforms such as Kickstarter and GoFundMe. These websites allow an individual looking for funding to campaign/request funds from investors to fund these projects or ventures. This is a unique funding method and is particularly interesting from the investor point of view. Investors can provide funding for a project at no cost through philanthropy, future equity positions and other tangible rewards as noted in the funding agreement.

So what’s the big deal, right? Sound awesome, but as with any investment, what about basis? What are the tax implications?

The tax implications of crowdfunding are just as new to tax experts as crowdfunding is to Main Street investors. When looking at the implications, you have to first identify the campaign your clients funded. Specifically, was the crowdfunding in question an equity-based project? To be clearer, did the investor receive an equity stake in exchange for his funds? Yes, some funders finance projects for honorable mentions and cool coffee mugs. Honorable mentions do not involve an exchange of equity or debt positions and would not be considered investments, so they are not deductible as losses or charity in most cases. However, if the funder provided funds in exchange for an equity position, the taxpayer now has a basis in the company and would recognize gains or losses on Schedule D, just like any other publicly traded company’s stock.

Crowdfunding is new, and like any other investment vehicle, it should be done with proper due diligence for those investing for equity positions. Luckily, for those taking such risky equity positions, the IRS allows any capital losses incurred to be deductible up to the capital loss ceiling.

Jeff Wilson II, CPA/PFS, CGMA, CFE, CDFA, is principal of The W2 Group, LLC., a solution-driven accounting and advisory firm specializing in bringing cloud-based solutions and efficiencies to their clients, including associations and government contractors. The firm is an SBA-certified 8(a) Small Business and MBE-certified accounting firm headquartered in Upper Marlboro, MD. Jeff is a graduate of Bowie State University, and a former Big 4 CPA who uses his compound domain expertise to bring a blend of best practices learned at Large organizations with practical application for his small business clients. Through his efforts, the University could implement various financial constraint measures while maintaining the integrity of the University’s essential services. As a result of his work, he became the only student director under the Finance and Administration Division. In February 2007, he featured in Black Enterprise Inc. magazine as No.77 Financial Fitness Winner. The magazine recognized him for his insight on personal finance and investments. Jeff is a frequent presenter at workshops and seminars on small business. He was named a 40 under 40 CPA by CPA Practice Advisor, and is author of “The Lies our Parents Were Sold and Told Us.” Jeff has also been named 40 under 40 Black CPAs and a board member of the Maryland Association of CPAs. He is also a BFTP Level 1 of the Future Harvest Program and a “rehabilitating farmer.” More from Jeff Wilson, CPA/PFS, CGMA, CFE, CDFA

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