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.