GoFundMe campaigns stemming from the COVID-19 pandemic are prolific across the crowdfunding platform, but limited guidance from the IRS about online fundraising has left some individuals unsure of the tax treatment of the money received.
Pandemic-related causes on GoFundMe range from bartenders seeking monetary relief because of shutdowns to a family of seven whose mother was hospitalized with coronavirus; they turn to the platform in an attempt to pay various bills. In all, GoFundMe campaigns have raised over $9 billion from more than 50 million donors since the site’s 2010 launch.
While gifts are typically excluded from income under section 102, part of the problem is that GoFundMe and other websites create a platform for a wide range of purposes — including business ventures — that have different tax treatments. That makes it challenging for the IRS to broadly address the tax treatment of funds received from those platforms, Ruth M. Madrigal of KPMG LLP told Tax Notes.
“In the bigger picture, GoFundMe and other platforms do raise a lot of complicated questions,” said Madrigal, a former attorney-adviser with Treasury, before describing the situation of an artist who crowdfunded the publishing cost of a comic book online and then provided copies to funders.
Those types of situations don’t necessarily involve donative intent, Madrigal said, adding that detached generosity is also an important aspect of a bona fide gift that can be excluded from tax.
Charles J. O’Donnell, a CPA based in Clearwater, Florida, said he had a client who received a letter of deficiency from the IRS after using GoFundMe to raise $50,000 for medical bills resulting from a heart condition, which went unreported on the tax return.
O’Donnell said he wrote to the IRS explaining the situation and showing that the client had taken deductions only for medical expenses that exceeded the $50,000 that was raised — about $20,000 to $30,000 more than that amount — backed up with receipts.
O’Donnell said people have to be aware that companies like PayPal are required to file Forms 1099-K with the IRS for GoFundMe campaigns that receive more than $20,000 and over 200 transactions in a given year.
O’Donnell said he could see the issue increasing with the surge in COVID-19-related GoFundMe campaigns, but that it’s Congress's job, and not the IRS’s, to address the nature of income received through those campaigns under the tax code.
To avoid a letter from the IRS, O’Donnell said recipients can report on Forms 1040 the amount they received from a GoFundMe campaign under the “other income” line and then deduct it as a nontaxable gift on that form with a statement describing the deduction.
“Keep very accurate records,” O’Donnell said, adding that the taxpayer should show that nobody received a quid pro quo for a donation and that the situation should be one in which people are donating out of altruism. “You must be able to prove it as a gift,” he added.
O’Donnell also said it would be wise to omit the terms “income” and “income replacement” from any campaigns.
‘Guidance for Ordinary People’
In all likelihood, many of the people benefiting from GoFundMe campaigns — especially those with large medical or other expenses — tend not to have tax professionals working for them that could advise on the tax treatment of specific received donations, said Madrigal.
What many people may be looking for is guidance on need-based situations — for example, someone with no assets using an online crowdfunding platform to raise funds for medical bills or rent, Madrigal said.
“I would be interested in knowing [the answer] if you ask that narrow question,” Madrigal said, adding that funds in that circumstance often come within the definition of a gift.
“What’s missing is guidance for ordinary people,” Madrigal said.
Discussing hardships stemming from COVID-19, Madrigal brought up section 139, which states that gross income shouldn’t include any amount received by an individual as a qualified disaster relief payment. “We’ve got a qualified disaster here,” said Madrigal, adding that qualified disaster relief payments are intended to pay for or reimburse additional expenses stemming from a disaster, but not to serve as a form of income replacement.
Madrigal said the tax deduction under section 170 is available only if one is giving to a charitable organization, and that if people want that deduction, they should donate through a 501(c)(3) organization such as a community foundation.
Brittany Benson of the Tax Institute at H&R Block said her company’s software and online DIY return preparation products don’t ask specific questions about personal gifts.
Benson said that donations made to an individual — for example, someone experiencing financial difficulties or raising funds online for medical treatment — are generally considered personal gifts and aren't taxed as income to the recipient.
“In most situations, the crowdfunding site will not report these funds as income to the recipient at the end of the year, nor will they issue any tax documents,” said Benson.
“Although it is less common, if the organizer intended to raise funds in exchange for goods or services, the raised funds are considered taxable income. In this case, the crowdfunding site will generate a 1099-K form for the individual or entity who received the funds to report the funds as business income,” Benson said.
The IRS and GoFundMe
IRS information letter 2016-0036 states that crowdfunding revenues are generally includable in income if they aren’t gifts made out of detached generosity and without any quid pro quo, loans that must be repaid, or capital contributed to an entity in exchange for an equity interest in the entity.
A voluntary transfer without a quid pro quo, however, isn’t necessarily a gift for federal income tax purposes, according to the letter, which adds that crowdfunding revenues must generally be included in one’s income to the extent they’re received for services rendered or are gains from the sale of property.
“The income tax consequences to a taxpayer of a crowdfunding effort depend on all the facts and circumstances surrounding that effort,” the letter says.
IRS Publication 525, “Taxable and Nontaxable Income,” states that in most cases, an amount included in an individual’s income is taxable unless it is specifically exempted by law, and that income that is nontaxable “may” have to be shown on the individual’s tax return but isn’t taxable.
GoFundMe’s website states that donations made to fundraisers on its platform are usually considered personal gifts, which mostly aren’t taxed as income, and that those donations are not tax deductible for donors.
“However, there may be particular case-specific instances where the income is in fact taxable for organizers (depending on amounts received, use of the funds, etc.), so we recommend that you maintain adequate records of donations received and consult a tax professional to be sure,” GoFundMe says.
GoFundMe says it won’t report donations as income at the end of the year or issue any tax documents and that it is unable to give tax advice.
The IRS declined to comment but referred to its information letter, Publication 525, and other resources used for this article.