Salon has an important article to read if you are an artist trying to use Kickstarter to fund a project. Apparently people don’t realize the money they receive via Kickstarter is considered taxable income by the IRS.
In short, money raised from Kickstarter and other crowdfunding platforms is considered to be taxable income. Amazon Payments, which handles the credit card transactions for Kickstarter, disburses the funds to the project creator and sends them a 1099-K, a tax form that reports “Merchant Card and Third Party Network Payments” to the IRS. In this particular case, a pledge made by a fan to a project would be considered a third-party network payment.
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“Although musicians may not necessarily be selling something via Kickstarter, they are still entering into a transaction with their backers,” he noted. “If they reach their goal of ‘X’ amount of dollars, they have certain conditions they’ve agreed to make. They should consider the money as income because the IRS defines gross income from ‘whatever source derived,’ unless specially excluded.”
The article also notes that artists often underestimate the cost and logistics of making good on their promises. One woman promised her supporters tickets to a show so when she exceeded her allocation of comp tickets, she had to buy the rest herself. Another ended up spending $10,000 in postage mailing out the items she promised.
Kickstarter also brings an issue artists have faced with their patrons since time immemorial–their desire to be involved in all the decisions.
The issue for Dawn was intensified by her raising five times the amount of her set goal. Suddenly, fans were complaining that she didn’t really need the whole $104,000 to record the album. Dawn countered by noting that not only did she use all of her Kickstarter funds, but she also opened four separate credit cards and dipped into her life savings to cover the difference.
One of those interviewed for the article suggested that anyone thinking of launching a campaign consult with an accountant or business manager first to plan for the tax liabilities and expenses the campaign will entail.