Q: How is crowdfunding taxed?
A: There are four taxable ways money raised in crowdfunding can be categorized: Sales Tax, Income Tax, Equity, or Gifts: Sales Tax Most crowdfunders do not think of the money raised during their campaign as sales, but given a closer look, much of crowdfunding is pre-selling. If a backer contributes money and in return receives a salable product (CD, DVD, IPhone case, etc.), the money received is from a type of sales, and thus, is susceptible to sales tax. Understand how you gave your prizes to your backers, and then decide whether the funds you raised could be seen as sales by the IRS. Income Tax The most likely category that crowdfunding money will be put in is the income category. Since the crowdfunder is earning money for a product or service, which the backer is receiving, the money will usually be labeled as income. This is the most common category that crowdfunding money falls under. It is often seen as the most fitting category, and you have to remember that money is likely not exempt from income tax. However, there may be exceptions for colleges and nonprofits using crowdfunding, so it is best to ask an expert when unsure. Equity Having funds fall into the equity category is still on hold in the United States. For the latest news on the issue check out this article. If you are outside the US, explore this infographic on one successful investment based platform in the UK. Gift Gift is the most appealing category to have crowfunding money be labeled under. Section 118 and 102 of the Internal Revenue Code excludes gifts from taxable income, so wanting the money from your crowdfunding campaigns to be labeled as a gift is understandable. However, since prizes are often offered in exchange for a backer’s contribution, the money will not likely be valid gifts. For more details on gifts check out this article. Q: What steps are necessary for a successful campaign? 1. Develop your story. Crowdfunding is all about stories. Unlike traditional websites that focus on products, people on crowdfunding sites like Kickstarter or Indiegogo want to know how you turned your idea into a reality. Explaining why you need their support is just as important as the product you are pitching. 2. Write your video script. Be sure to have the storyboard of your crowdfunding video dialed in before you plan to shoot. In my first campaign, we worked on our video for over 30 hours because we didn’t know how we wanted our video to look. Plan your video ahead so you don’t waste time. 3. Shoot your video. Almost anything works for a crowdfunding video but if you’re looking for a more professional video that doesn’t break the bank, reach out to the university in your area. Chances are you can find an experienced student willing to work for cheap in exchange for a chance to build their portfolio. Related: Why I Think the Hype About Crowdfunding Is Too Good to Be True 4. Product photos. The presentation of your product while crowdfunding is very important. Taking the time to find professional photographers is completely worthwhile. For Yes Man, we were fortunate to connect with a friend who ran Rapid Eye Studios in San Diego. Utilize your network to find people who are willing to work for a discounted rate. 5. Your website. Having your company’s website completed is not crucial but is recommended. A website further validates you are a legitimate company, which crowdfunding supporters like to see. All you need is a landing page that gives some more information about your company. 6. Crunch your numbers. It is essential to know how many units you need to sell to reach your crowdfunding goal. This will put your goal in perspective. When we launched our first campaign, I knew to surpass our $15,000 goal we needed to sell 152 watches at $99 each. 7. PR outreach. An often overlooked part of crowdfunding is spreading the word. Many project creators assume their projects will somehow automatically get noticed. Reach out to media outlets that cover your type of campaign. An effective way to find the right media outlets is through a Google Image search. Simply take a photo from a similar campaign and upload it to Google. Google will then display all blogs, newspapers and other media that have covered that campaign. 8. Submission. Sites like Kickstarter use their own guidelines to accept or deny a campaign. They don’t accept all crowdfunding projects. That may be obvious to many but wasn’t to me when I launched our first crowdfunding campaign. The approval process can take a few days and may require you to make some changes to your campaign. Be sure to submit your campaign at least two weeks prior to your launch. Q: What websites would you recommend to start a campaign? A: Below is a list of websites recommended by top entrepreneurs: Indiegogo. Originally launched with a focus on film, Indiegogo pivoted to include funding for literally anything and is becoming known for financing personal and cause-related campaigns such as that for the bullied bus monitor, which raised over $700,000. It accepts all projects without review. As Indiegogo says on its website, "Our platform is available to anyone, anywhere, to raise money for anything." While its success fee at 4 percent is 1 percent lower than most websites (which charge 5 percent), it does charge one of the highest fees in the industry -- 9 percent -- if you don't meet your goal. RocketHub. Initially launched with the arts in mind, it expanded to include science, education, business and social good projects. It gained traction in the sciences with its annual SciFund Challenge, an online effort to fund science projects. It also launched a partnership with A&E Networks through which some select projects will be chosen to receive extra support from the joint initiative. Peerbackers. Consistently recognized as one of the top crowdfunding websites in the industry, peerbackers, which I co-founded and run, focuses on funding entrepreneurs and innovators. The platform has hosted thousands of creative, civic and entrepreneurial projects from around the world and recently expanded to include young entrepreneurs ages 13 to 17 through partnerships with student organizations. After seeing such a high industry failure rate for crowdfunding projects, peerbackers launched Crowdfunding Academy to offer education and support to those who want to crowdfund. Kickstarter. The most well-known of the crowdfunding websites, Kickstarter focuses on creative endeavors including design, the arts (film, publishing, music), gaming and technology. While Kickstarter can't be used to fund businesses per se, it does accept products and has had some remarkably successful campaigns, including about 50 that have generated over a million dollars in funding. Kickstarter "curates" its projects, meaning it has a rigorous submission process, and if you aren't approved to post, it can be quite disappointing. SoMoLend. A peer-to-peer platform, it facilitates friends-and-family loans, accredited investor loans, and bank loans to business borrowers looking for funding. The website targets brick-and-mortar companies that already have customers and cash flow and can service debt. Typically it looks for a business that's at least a year old and has at least a year's worth of receipts. Unlike most business lenders, SoMoLend doesn't rely heavily on FICA scores. It considers numerous factors, both traditional and nontraditional (social reputation and behavior, Klout score and online presence), to determine a rating that predicts what interest rate you'll be asked to pay from those who back the loans. SoMoLend anticipates opening up the funding of its loans to the general public in early 2014, when the JOBS Act is fully implemented. Endurance Lending Network. Endurance Lending Network is a web-based lending platform that connects small businesses looking for up to $500,000 of debt capital with nontraditional lending sources (accredited individuals, family offices, wealth management platforms, debt funds, etc.). It aggregates and filters the opportunities into investment pools using web-based on-boarding and a sophisticated credit algorithm that is much different and more effective for entrepreneurs than those that banks use. Grow Venture Community. One of the first global, community-based platforms dedicated to entrepreneurs and investors, Grow VC enables great ideas to get visibility with the right investing audience and early support. Grow VC is more than crowdfunding— it's an ecosystem where entrepreneurs can connect with experts, funders, team members, new customers and partners to realize their ideas. CircleUp. A niche equity website with a focus on high-growth consumer product and retail companies, CircleUp has partnered with Procter & Gamble and General Mills to offer more value beyond the funding, giving entrepreneurs access to these brands. There is no fee for investments from friends and family. CircleUp charges a fee only if you raise capital with a listing on its website from new investors subscribing via its broker partner WR Hambrecht + Co. |