Are Kickstarter Funds Taxable? Here’s What You Need To Know.

Donate. Pledge. Back.

These are the sorts of words that people tend to use when they give money to Kickstarter campaigns. And it makes perfect sense because Kickstarter uses phrases such as “bring a creative project to life” prominently on their website.

But running a Kickstarter is a business, full stop. And the IRS? It makes no distinction between funds raised on Kickstarter (or any other crowdfunding platform) and plain old business revenues.

That means that like any other business, you’re required to comply with tax regulations and obligations. In the United States, and many other countries, the funds you raise on Kickstarter are considered taxable income. As a creator, your profit — the amount left after deducting costs associated with rewards and fulfillment from the total raised — is subject to income tax.

Are Kickstarter funds taxable?

Short answer: yes.

But as you’d expect, there’s more to it than that, which we’ll briefly cover in this article. We’re going to focus on taxes in the US, but know that many other countries follow similar rules. 

Disclaimer: We’re not accountants. We help Kickstarter creators ship orders, so the following information is for general guidance only. Always consult with a professional tax advisor or accountant for advice tailored to your specific circumstances.

Kickstarter Funds Are Taxable. But Why?

When it comes to making money, the IRS recognizes that there are different reasons why your wallet might be getting bigger. So they categorize financials differently, which includes gifts, donations, and income.

Gifts are generally not considered taxable for the receiver. They are typically given out of disinterested generosity, such as a birthday present, without any expectation of getting something in return. The refund you got on that “live, laugh, love” sign you got from your great-aunt, mercifully, falls into the gifts category according to the IRS. But on Kickstarter, you’re expected to send a reward back, so the money you receive is not a gift.

On the other hand, there are also donations, usually made to non-profit organizations. For the most part, these can be deducted from the donor’s taxable income. But for the receiver, if the organization isn’t a registered non-profit, these donations are usually considered taxable income. This doesn’t apply to Kickstarter projects, which famously cannot include campaigns for charity.

That leaves only the category of income. That’s the money you receive in exchange for goods or services. This is taxable and must be reported on your annual tax return, According to the IRS, money raised on crowdfunding platforms like Kickstarter is generally considered income. 

Fortunately, since Kickstarter campaigns are generally considered businesses, you can usually deduct business expenses from your income. That can dramatically reduce your tax liability. But you should really consult with a tax professional to understand what expenses you can legally deduct. (Plus, their help often ends up paying for itself.)

A Quick Note on Sales Tax

Everything we’ve talked about so far concerns federal taxes. We’d be remiss if we didn’t at least mention sales tax.

Long story short, if your Kickstarter campaign involves selling physical products, you will probably have to collect and remit sales tax. This usually applies when you have a physical presence (nexus) in the state where the product is delivered.

Each state has different laws regarding sales tax, so it’s advisable to consult a tax professional to ensure you’re compliant. And if you need software to help you keep track of this sort of thing, Avalara and TaxJar are good options.

Filing Requirements in the US

In the United States, the IRS requires Kickstarter creators to file a 1099-K form if their campaign reaches a certain threshold: over 200 transactions and gross payments exceeding $20,000 in a calendar year. But starting in the 2024 tax filing season, that threshold is going to drop to $600, irrespective of the number of transactions.

This form is provided by the payment processors (not Kickstarter itself) and reports the gross amount of transactions for the year. If you meet this threshold, you’ll receive the 1099-K form by January 31st of the following year.

Long story short – if you get this form, file it with your taxes. It takes very little extra effort and is generally not something worth stressing about too much, as long as you simply make sure to do it.

However, regardless of whether you receive a 1099-K form, you will need to report any taxable income derived from your Kickstarter campaign to the IRS. The way you do this depends on your business structure.

If you’re operating as a sole proprietor or single-member LLC, for instance, you’ll most likely need to report this income on your 1040 form, specifically on Schedule C (Profit or Loss from Business). This form is used to report income or loss from a business you operated or a profession you practiced as a sole proprietor.

Filing a Schedule C will take some work and will require you to keep clean accounting books. We strongly encourage you to keep a separate bank account and use accounting software such as QuickBooks or Xero on a weekly basis to make this part of tax filing easier.

If you’re operating as a partnership, a corporation, or have multiple members in an LLC, ask your tax advisor about the filing requirements that will apply to your situation. And no matter what type of business you’re running, make sure you also apply to your state income tax laws as well, if you are in the US.

Reducing Your Tax Burden with Deductions

You might be worried that if you file Kickstarter revenue on, say, your personal taxes, you’ll owe a very high percentage of it to the IRS. In practice, though, you will only have to pay taxes on profit plus any expenses you cannot deduct.

Qualified expenses related to your Kickstarter campaign can be deducted from your taxable income. These might include costs for product development, marketing, shipping, and even certain home office expenses if you’re working from home. Note that these expenses need to be both “ordinary” (common and accepted in your field of business) and “necessary” (helpful and appropriate for your business).

To take advantage of these deductions, make sure to keep detailed records of all your Kickstarter-related expenses throughout the year. This will not only help you at tax time but also provide a clearer picture of your campaign’s financial health.

Quick Summary

Yes, your Kickstarter funds are taxable. Residents of the US will owe federal income tax at a minimum, and possibly state income tax and sales tax as well.

However, the filing requirements are usually not too complicated. They will generally be very similar to other business ventures. Most Kickstarter creators will need to submit a 1099-K form. Sole proprietors or single-member LLCs typically report this on the 1040 form (Schedule C).

The IRS classifies money raised on Kickstarter as income when it is exchanged for goods or services, making it distinct from non-taxable gifts or tax-deductible donations. But luckily, you can deduct many, if not most, of your business expenses.

With all this in mind, don’t let the fact that Kickstarter funds are taxable deter you from launching your product! It’s just something you need to be aware of so that you can plan for it.

And if you haven’t already, reach out to an accountant in town. They can help you with all the quirks and details of doing business in your country, region, and city.