This blog was last updated on December 28, 2022
Editor’s note: This blog was updated on December 28, 2022
Update: Since this content was published, the IRS released guidance that the implementation of the reduced $600 threshold for 1099-K reporting will be delayed until tax year 2023. As a result, the federal threshold for the 1099-K form reporting for tax year 2022 will remain unchanged at $20,000 AND 200 transactions. Read our recent blog post for additional details on this federal change as well as state 1099-K reporting implications.
Last week, the IRS released a Fact Sheet alerting taxpayers that received money through “crowdfunding” that they may need to pay income taxes on that donated income. The clarifications were also aimed at payers of crowdfunding payments obligated to issue and file Form 1099-K Payment Card and Third Party Network Transactions for those donation payments.
Threshold change clarifications
For 2022 returns, the American Rescue Plan Act (ARP) changes the required reporting thresholds for Form 1099-K. Up until 2022, a third-party settlement organization (TPSO) was required to report Form 1099-K when the aggregate of payments paid to a payee in the calendar year was $20,000 and those payments were paid over 200 transactions. For 2022 returns and beyond, a TPSO must file Form 1099-K when the aggregate of payments paid to a payee in the calendar year is $600 and there is no transaction limit.
These changes align the Form 1099-K reporting thresholds with other 1099s that report nonemployee compensation income including Form 1099-NEC Nonemployee Compensation and Form 1099-MISC Miscellaneous Information.
Goods and services clarifications
ARP also changed the tax law to specifically state that Form 1099-K should only be issued for payments that represent goods and services income. Despite the reference to goods and services payments in other parts of the statute, the tax law previously did not specifically limit reporting to payments of goods and services. As a result, the IRS received erroneous Forms 1099-K from some payment processors, which created tax issues downstream for the taxpayer.
The Fact Sheet further clarifies that payments that represent nontaxable income are not includible in gross income for tax purposes. Therefore, payments that represent nontaxable income, such as charitable donations raised through crowdfunding platforms, should not be reported on Form 1099-K.
When are crowdfunding payments reportable on Form 1099-K?
Starting with returns filed for 2022, payment processors that facilitate crowdfunding payments are obligated to report Form 1099-K when they make distributions of crowdfunding amounts that aggregate to $600 or more and when the contributors to those campaigns received goods and/or services in exchange for their donations.
To be clear:
- Do not issue Form 1099-K to a recipient for crowdfunding payments that do not aggregate to at least $600 paid during the calendar year, AND,
- Do not issue Form 1099-K to a recipient for crowdfunding payments when contributors to the campaign do not expect to receive anything in return for their donation.
Who should receive Form 1099-K for crowdfunding payments?
Depending on the arrangement, donations collected from crowdfunding activities are sometimes paid to the organizer of the campaign. Other times, the donations are paid to the individual or business for which the donations were solicited.
The Fact Sheet is clear that the TPSO is required to issue Form 1099-K to the individual or business for which the donations were solicited when those donation payments are made directly to them (and then they meet the requirements described previously). Alternatively, if the amounts are paid over to the crowdfunding organizer, then Form 1099-K must be issued to the organizer instead.
When are crowdfunding payments not reportable on Form 1099-K?
The IRS pointed out that federal law taxes gross income from whatever source derived unless it is specifically excluded from gross income by law. When a donation is given through a crowdfunding campaign where the contributor does not expect anything in return, the item is generally treated as a gift and excludible from gross income and, therefore, not reportable.
Crowdfunding organizers must demonstrate donations were truly gifts
One of the most important details for a crowdfunding organizer to make note of is the last two sentences of the Fact Sheet, which discusses their obligations to keep records. The IRS generally audits taxpayers for up to three prior calendar years and that includes TPSOs required to issue and file Form 1099-K for payments they make related to crowdfunding activities.
It is critical to have detailed records of the campaign activities and all distributions of payments, including records of Forms 1099 issued or documentation explaining why Forms 1099 were not issued, in the event of an IRS audit.
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