It has often been said “Money never starts an idea. It is always the idea that starts the money” But once the money actually starts, and continues to come in, the one thing you can be sure of is that the question of taxes will be asked. The answer will vary all around the globe, and the way in which it is assessed and countless complex external considerations need to be factored in. Wading through all of this requires a knowledge of local tax laws, as well as an intimate understanding of the project creators personal circumstance.
The first consideration must be that of the nature of the incoming funds. Depending on how the campaign has been structured will affect the manner in which the contributions are assessed. If the campaign is put together in a manner that makes the revenue appear as “income”, it will be viewed in a very different manner to a case in which the monies raised are considered as “capital contributions”, as both have very different regulations around how both are taxed.
And it is not only the structure of the campaign and the resulting nature of the contributions that need to be considered. The structure of the project creator should also be understood, as the income will be assessed very differently if the project creator is an individual as opposed to if they are a business or corporation of any sort. The scenario changes quite considerably again if the entity is a Deductible Gift Recipient (DGR) or a registered charity to whom donations are tax deductible.
There are also views around how the activities of the project creator are factored in to their regular income generating activities. If the project for which they are crowd funding is a hobby, it may put yet another slant on the assessment of the revenue generated. Are they doing it as a one off, or will this be an ongoing activity, and how does it tie in to the primary income of the project creator?
Many countries have a Goods and Services tax (GST) or a Value Added Tax (VAT) or any similar form of consumption tax. Different campaigns and different situations in different countries will cause the income generated by a crowd funding campaign to be assessed in different ways as to whether the consumption tax in payable and whether this proportion of the funds raised needs to be bundled up and sent off to the government. If there is a consumption tax component payable on funds raised, the good news is that input credits, or the consumption tax paid by the project creators on items purchased and costs associated with the manufacture, provision and delivery of the project outcome, can be deducted from the money owed to the government for consumption taxes collected.
And the other good bit of advice for those whose campaign funds are liable under local tax laws is that many of the costs of good, raw materials, and expenses are tax deductible. This means any costs you incur as a project creator could possibly be taken off the amount you have raised, and tax is only payable on the net balance once you have taken your costs off the total raised (and not on the total raised itself).
Confused? Scared off?? Feeling a headache coming on???
Relax. There is one overarching piece of advice that can help clarify things simply and easily for each person in every scenario and in every case. And the advice is this – Please ensure you discuss your campaign with your accountant, tax advisor or financial consultant before you embark. They will know your own particular circumstance, and marry this to their understanding of local tax law, which should give you comfort around your liabilities and responsibilities to the taxman.
Crowd Funding – the Complexity of Taxation