Crowdfunding Tax Returns
We provide Tax services for initiators, investors, project managers as well as for donors of a crowd funding scheme. Our expert accountants can help you prepare the tax returns in the most appropriate manner if you have been involved in a crowd funding activity.
Large pool of capital always plays a vital role in a business world. It always leads to question whether business idea selected is feasible or not. Borrowing money through issue of shares and loans from financial institutions is the most traditional and common way to raise capital. However, there is a new way to fund your ideas without going through all burdensome paperwork and complex creditability checks. Crowdfunding is the most modern way to raise your capital. As per estimates, about 50% of all funding in the year 2040 will be via crowdfunding. Crowdfunding at the moment is in its initial stages of evolution but as time proceeds it has the potential to become one of the most prominent ways to raise capital. It is currently acting as alarming to outpace all other ways of raising capital in a few decades.
Crowdfunding is a method of raising fund by combining little individual investments into a large pool of capital. There are three main parties involved in the crowdfunding arrangement: The initiator of a business idea, the organization who creates a platform between parties and the contributor who invests financially or materially into the project.
Tax issues become a concerning matter as the project generate income for all the parties involved. There are two types of tax effects to be considered: GST and Income Tax. Depending upon the scenario, GST or income tax will be applied accordingly.
In general, there are four different kinds of crowdfunding: donation-based, debt-based, equity and rewards-based.
The donation-based crowdfunding is recognized when contributors donate gifts or money to a project through a platform without expecting any payment or reward in return. In this case, the project is not for profit and contributors will not receive any benefit from such a donation. Thus, GST and Income Taxes may not be relevant. Nevertheless, the crowdfunding platform will have to pay income tax as they usually charge initiators an amount of fees for providing their services.
Secondly, the debt-based crowdfunding occurs when initiators borrow money from contributors. In return, the contributors will receive interest and principal after an agreed period of time. Income tax gets applied as contributors earn interest and the mediator company i.e. (the crowdfunding platform) receives the service fee. The initiators will have to consider income tax as well as GST regardless of whether their project is making profit or loss.
Thirdly, the equity crowdfunding is a transaction between contributors and initiators, in which the contributors pay to receive share of a company including voting rights or dividend payment. In such a scenario GST may apply to the initiators who are allotting shares and income tax is applied to the dividends earned on those shares from contributors.
The final one is a rewards-based crowd funding business. In this crowdfunding method, contributors pay money to the initiators with expectation to receive discounts or any products before selling to public. Here the contributors have to consider GST on their received products and initiators will have to consider income tax on sold products or the amount of funds they received. The initiators would also need to account for GST on moneys received.
Income tax applies when there is any intention or activity to carry a business or profit-making schemes. It is understandable that the tax issues are complicated and different based on each circumstance including size of the business, type of funding and purpose of a project. To make sure that you do not miss out any tax compliance obligations and avoid tax penalties, it is wise to consult with a qualified and trained tax professional. There can be chances of getting incorrect tax effects due to such high complexity in its methodologies. However even with the complexities the concepts of taxing income within accruals or cash basis of accounting still remains the same.