The Internal Revenue Service released a fact sheet that defines crowdfunding as a method to raise money on websites by soliciting contributions from a large number of people. This article considers how crowdfunding is treated for tax purposes and argues that, contrary to the fact sheet’s determination, all donations collected by commercial websites should be income to the recipient.
Introduction
Recently, the Internal Revenue Service (“the Service”) released a fact sheet reminder of “tax guidelines involving contributions and distributions from online crowdfunding.”1 The Service stated that “[c]rowdfunding is a method of raising money through websites by soliciting contributions from a large number of people. The contributions may be solicited to fund businesses, for charitable donations or for gifts.”2 Examples of crowdfunding websites are Kickstarter3 and GoFundMe.4 This article reviews the tax treatment of crowdfunding and criticizes one important determination of the Service’s fact sheet.
I. The Kickstarter Model—Crowdfunding Projects
One popular website for crowdfunding projects is Kickstarter. As of March 2025, Kickstarter claims to have funded over 250,000 projects and raised more than $8 billion.5 Although the website claims to not be a “store,” users pledge money to projects in exchange for something of value, specifically “rewards that speak to the spirit” of the project.6 For example, the largest Kickstarter campaign ever was created by fantasy author Brandon Sanderson.7 Raising almost $42 million, backers pledged at different levels depending on whether they wanted Sanderson’s new works in ebook, audiobook, or hardback form.8
The tax result to the creator of the project is simple. The taxpayer has income for any funds received on account of their Kickstarter project.9 The funds are essentially preorders for whatever the project creator has promised to provide to the backers.10
A more difficult tax question (and one not discussed by the fact sheet) arises if the Kickstarter project falls through and the backers receive neither what was promised nor a refund of their funds. According to a 2015 study by Professor Ethan Mollick from the Wharton School of the University of Pennsylvania, the failure rate for funded projects was around nine percent.11 In only thirteen percent of those failed cases did the backers receive a refund.12 Should a taxpayer be able to take a tax loss for a Kickstarter project that they back and does not deliver? Assuming that the taxpayer backed something personal (as opposed to something that he or she planned to use for investment or business purposes), the answer is probably not.
As a personal loss, the only provision that might allow a deduction is § 165(c)(3) of the Internal Revenue Code of 1986 (“Code”).13 Since nonfulfillment will not qualify as an “other casualty,” the taxpayer’s sole chance for a deduction is to label the loss as a theft loss.14 A “theft” is defined “general[ly] and broad[ly]” and is meant to cover “any criminal appropriation of another’s property to the use of the taker, particularly including theft by swindling, false pretenses and any other form of guile.”15 The Service stated that in determining if a theft has occurred, the laws of the local jurisdiction where the alleged theft happened shall apply.16
Would Kickstarter nonfulfillment qualify under this standard as theft loss? It depends on both local law and the facts and circumstances of the project. If a taxpayer could prove the creator never intended to fulfill the project, then the taxpayer likely qualifies in every jurisdiction.17 However, if the creator did intend to fulfill but some circumstance caused the project to fail (such as incorrect budgeting, increased costs, etc.), then it will likely be more difficult to meet the theft standard.18
Of course, there is the added hurdle that a taxpayer will likely only be able to use the theft loss deduction for any nonfulfilled project if (1) the loss exceeds $10019 and (2) they happen to also have personal casualty gains that year.20 Without any personal casualty gains to offset, the Kickstarter loss is unlikely to be deductible (even assuming it exceeds ten percent of the taxpayer’s adjusted gross income)21 since such loss will not be attributable to a “[f]ederally declared disaster.”22
II. GoFundMe Crowdfunding
The more interesting issue discussed by the Service’s fact sheet is the tax results to the recipient of funds from sites like GoFundMe.23 In its fact sheet, the Service is noncommittal. It states “[w]hether crowdfunding distributions are includible in gross income of the person receiving them depends on all the facts and circumstances of the distribution.”24 The fact sheet proceeds to set out the tax rules for gifts, stating that if the contributions “are made as a result of the contributors’ detached and disinterested generosity, and without the contributors receiving or expecting to receive anything in return, the amounts may be gifts and therefore may not be includible in the gross income of those for whom the campaign was organized.”25
This advice is essentially useless. How is a person to know whether a donation to a GoFundMe campaign was made out of detached and disinterested generosity? Simply giving to a campaign does not automatically meet the requirement.26 Even if it was made with such intent, the Service states that it “may” be considered a gift.27 This implies that there are situations where such amounts will still be income even with the appropriate intent, otherwise the word “shall” would have been more appropriate. The fact sheet does not provide any examples of a scenario that would require the recipient to report the crowdfunded receipts as income.28
The Service’s position unnecessarily muddies the issue. Under this advice, every taxpayer will take the position that GoFundMe receipts are nontaxable gifts. The GoFundMe website bolsters this conclusion by stating that donations “made to personal GoFundMe fundraisers are generally considered to be ‘personal gifts’ which, for the most part, are not taxed as income in the United States.”29 The company covers its rear however by also stating on its website that “there may be particular case-specific instances where the income is taxable for organizers.”30 But GoFundMe makes it clear that it will not report the collected funds as income to the Service.31 All of this leads to the likely conclusion that no taxpayer has reported or will report the receipt of GoFundMe funds as income under this system.
One possibility, of course, is that this is the correct tax result and so the fact sheet is a useful reminder of what the Service’s position is and should be. Unlike Kickstarter, there is no quid pro quo with GoFundMe.32 In addition, it is likely that most donations made using the GoFundMe site are genuinely made out of detached and disinterested generosity by the donor.33 Despite all this, as explained below, any funds received through GoFundMe or similar websites should be considered income to the recipient.
III. Detached and Disinterested Generosity
The phrase “detached and disinterested generosity” was used in the seminal case of Duberstein v. Commissioner.34 Code § 102 provides that gifts are excluded from income and thus the recipient of gifts does not pay any tax on the receipt of gifts.35 The question of what qualifies as a gift for purposes of Code § 102 is left to the courts. The facts of Duberstein were that, in appreciation of some business referrals, Duberstein received a “gift” of a Cadillac from a business associate.36 Duberstein did not report the value of the Cadillac on his tax return, contending it was a nontaxable gift, and the Service disagreed.37 The Service won at the Tax Court,38 but the Sixth Circuit reversed.39 The Supreme Court granted certiorari and held for the Service, setting out the standard for courts to use when determining whether something is a gift in future cases.40
While Duberstein is the most cited case on the definition of gifts for income tax purposes, it did not actually break new ground. It mostly restated standards that were used before by other courts.41 Even the standard “detached and disinterested generosity” was applied in a previous Supreme Court decision.42 Despite its status as the standard to use for whether a transfer qualifies as a gift for tax purposes, courts have noted that it is not a particularly helpful standard. One court referred to it as more “sound bite than talisman.”43
It is helpful, when considering what should qualify as a gift for tax purposes, to consider why gifts are excluded in the first place. When one focuses on the recipient of the gift, there is an obvious argument that gifts should be considered income. Take a simple example: two taxpayers each receive $100,000, but one receives it as a gift and one as compensation for services. Since both receive $100,000, horizontal equity44 suggests that the tax system should treat them the same for tax purposes—that is, they should both have income, and the source of the income is irrelevant. Many commentators have argued this and contend that the tax treatment of gifts should be changed.45
Why then are gifts excluded? One argument is administrative: it would be simply too difficult for the Service to oversee a system where gifts would be considered income.46 I have argued in previous work, however, that the current tax treatment is supported by a valid policy justification.47 The next Part briefly reviews the arguments that I previously made supporting the current tax treatment of gifts.48
IV. Consumption and Gifts
One generally accepted academic definition of income is that income for a period is comprised of two items: (1) present value of consumption and (2) accumulation of wealth.49 This is referred to as the Haig-Simons definition of income.50 Some commentators have argued that this definition supports the taxation of gifts since the source of the income appears to be irrelevant under this definition.51 This argument, however, focuses on the wrong party. Instead of the donee, one should look to the donor to understand the policy justification for the current tax treatment of gifts. Taxing income is a proxy measurement for the consumption that the taxpayer will do with that income.52 Thus, while consumption appears to be only half of the Haig-Simons formula, it is essentially all of it. The difference between a consumption tax and an income tax is that the income tax taxes the present value of future consumption by including accumulated wealth in the tax base whereas a consumption tax would wait until the money is actually used to consume.53
Taxing consumption is justifiable, but using it as the basis for defining income also provides policy justifications for situations involving exclusions from income. Gifts provide an ideal example. Assume A gives a gift of $10,000 to B. Has A consumed that amount? Clearly not, there is no consumption of resources or acquisition of some property to the exclusion of others. Instead, the consumption will take place when B uses the $10,000 for her own consumption. Basically, A has determined that she would receive more utility from having B consume society’s assets with the money rather than A consuming it herself. For this limited purpose, we are treating A and B as one entity. We see similar treatment with the basis rules for gifts of property as the donee steps into the shoes of the donor and takes the same basis in the property that the donor had at the time of the gift.54
V. GoFundMe Recipients and Craps Dealers
All of this seems to suggest that donations to a GoFundMe campaign should be nontaxable to the recipient of those funds. The donors are not receiving anything in return for their donation, and they are not consuming any of society’s assets. However, nonconsumption is not the only consideration when determining the tax treatment of gifts. The case of Olk v. United States55536 F.2d 876 (9th Cir. 1976). provides an example of a situation where other policy considerations come into play and trump the general nontaxable treatment of what appears to be gifts under Duberstein.
Olk involved casino crap dealers and the question of whether chips (or “tokes”) that patrons provided to the dealers should be considered income to the recipient dealers.56 Unlike tips to waitstaff or cab drivers, only a tiny percentage of casino patrons transferred tokes to the dealers.57 In addition, unlike the general consideration for “normal” tips, there was no quid pro quo allowed.58 Casino dealers were forbidden from showing favor to those who provided tokes over those that did not.59 The collected tokes were placed in a common pool and split evenly among the dealers.60
The district court held for the taxpayers (thereby excluding the tokes from income), finding that such transfers were done out of “impulsive generosity” and were the “result of detached and disinterested generosity.”61 The Ninth Circuit correctly reversed this decision and held for the Service.62 To counter the lower court’s findings of the appropriate intent by the game players, Judge Sneed stated that the tokes should be considered a “[t]ribute to the gods of fortune which it is hoped will be returned bounteously soon . . . .”63 Judge Sneed held that such hope meant the players were “involved and intensely interested” and thus the Duberstein standard was not met.64
It seems clear that Judge Sneed felt he had to proffer this argument to deal with the Duberstein intent test. However, later in the opinion, he provides the better justification for the correct result:
Moreover, in applying the statute to the findings of fact, we are not permitted to ignore those findings which strongly suggest that tokes in the hands of the ultimate recipients are viewed as a receipt indistinguishable, except for erroneously anticipated tax differences, from wages. The regularity of the flow, the equal division of the receipts, and the daily amount received indicate that a dealer acting reasonably would come to regard such receipts as a form of compensation for his services. The manner in which a dealer may regard tokes is, of course, not the touchstone for determining whether the receipt is excludable from gross income. It is, however, a reasonable and relevant inference well-grounded in the findings of fact.65
Olk thus provides the perfect example of a situation where, despite the appropriate donor intent and the lack of consumption, the transfer should still be considered income to the recipient. Essentially, situations can arise where other policy considerations are more important and therefore trump the usual tax treatment of a “gift” where there is no consumption by the donor. There is no mathematically precise test on when this exception should kick in; it is a facts and circumstances test. As Olk provided, we should consider how the transferee views the payment to help determine whether the exception should become the rule. Still, the factors present in Olk are not the only ones that should be considered.
Conclusion
The issue then is whether donations to GoFundMe should be evaluated under the traditional Duberstein analysis66 (as set out by the Service in the fact sheet)67 or should be considered an exception, like Olk, where other considerations trump the Duberstein standard and instead suggest that such transfers should be income, even when the transferors have detached and disinterested generosity and there is no consumption.68 The correct application should be that using GoFundMe to solicit donations removes the money transfers from the traditional Duberstein analysis. GoFundMe does not charge a fee to create a fundraiser, but it does collect a transaction fee for each donation.69 This moves the donations into the commercial space which supports the conclusion that this is more similar to Olk than Duberstein. Using any commercial website to solicit donations should lead to the conclusion that all donations collected via that site are income to the recipient.
This conclusion avoids the confusing treatment set out in the fact sheet. No longer does the tax treatment depend on unnamed circumstances. The rule would declare all collections to be income, and GoFundMe would be required to report all disbursements to the Service (and perhaps be subject to withholding requirements).70 This is not only the correct theoretical application of the tax law but also leads to an administratively simpler application for the Service. The Service should revoke the fact sheet and consider all GoFundMe-type donations to be income to the recipient.