Kickstarter has a tax help page on its website that states that funds raised on Kickstarter are generally considered income.

The website also says that recipients may be able to classify funds as “nontaxable gifts,” with no additional guidance as to what qualifies as a gift. So how do you know if the funds are income or gifts, and what are the tax implications?

For creative entrepreneurs, a Kickstarter project is an alternative way to raise money. For those not familiar with the paradigm, it works like this: A Kickstarter project creator sets a funding goal and a deadline date for the project. If people like it, they can pledge money to the project. If the project does not raise enough money to meet the funding goal within the project deadline, everybody gets their money back. All or nothing.

Lost in the excitement of a successful Kickstarter project, though, are the tax implications of the funding. Are Kickstarter monies received as income or as gifts? Here are some general areas of taxation that Kickstarter project creators should be aware of:

Monies As Gifts

If you report Kickstarter funds as gifts, the funds are not taxable to you as the recipient, but they could be to the gift-giver if the amount given is over a $14,000 threshold.

Kickstarter says pledges can be considered gifts if they are given out of “… ‘detached and disinterested generosity’ for personal reasons and without the expectation of getting something in return …”

However, contributors are often offered something in return for their pledge. Be careful here. The Internal Revenue Service is not likely to consider most Kickstarter funds received to be gifts from the contributors.

No matter what it says on the Kickstarter website, if something of value is received in return for the contribution, there is probably a tax liability, so talk to a tax lawyer or tax law professional. (Read more about this in next paragraph).

Don’t Forget Sales Tax on Gifts to Contributors

Many Kickstarter project contributors get what are sometimes referred to as “gifts,” but these gifts are really products or services received in return for contributions. These products or services may be subject to sales taxes. This means the project creator may be responsible for collecting and paying the sales tax on products or services given in return for their contribution to the project. Once again, talk to a tax lawyer or tax law professional.

Monies As Income

In most cases, monies received via Kickstarter are going to be treated as taxable income. Report the funding as income to the IRS. Like any business revenue, taxes owed on the Kickstarter funding can be offset with business expenses.

According to Kickstarter, as of February 2015, $2 billion has been pledged to projects on Kickstarter, with Wikipedia stating that the largest project to date garnered more than $13 million in pledges. As an alternative funding source, this is certainly worth looking into.

— This article was written by the Tax Law Team at Rogers, Sheffield & Campbell LLP of Santa Barbara. Click here to read previous columns. The opinions expressed are their own. This article is not intended to provide legal advice. For legal advice on any of the information in this post, click here for the form or phone number on the Rogers, Sheffield & Campbell Contact Us page.