I am not a tax expert and none of the information in this or any other post is intended as, nor should it be construed to be, tax advice. If you need tax advice, consult a tax specialist or the appropriate government tax agency.
Depending on what source you use as to how it’s defined. For example, Wikipedia defines it as https://en.wikipedia.org/wiki/Crowdfunding:
Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet.
They do separately define crowdsourcing as https://en.wikipedia.org/wiki/Crowdsourcing
Crowdsourcing is a sourcing model in which individuals or organizations obtain goods and services. These services include ideas and finances, from a large, relatively open and often rapidly-evolving group of internet users; it divides work between participants to achieve a cumulative result.
Many people use the terms interchangeably. My definition tends to be broader than some. I include things like Patreon, Ko-fi, Buymeacoffee, etc. as crowdfunding, more so the sites where you can generate monthly income. Some would disagree. In a more general sense, regular social media, like YouTube, and blogs that generate ad revenue, affiliate link revenue, or any other source of revenue for the individual are small-scale crowdfunding opportunities. However, as I mentioned in 90 of the Biggest Earners on Patreon (And What They’re Selling) From $456 to $34,420 in monthly revenue May 2017 Article, there are a number of people on Patreon generating a steady monthly income. Six of the above Patreon‘s pages earn $19,900+/month with two earning over $30,000/month.
In some of my business courses in college, professors tackled two (2) questions managers needed to answer:
1) How does it affect or impact me?
2) Why should I care?
Typically, these answers are often interconnected. For example, how it impacts you may determine why you should care. On the other hand, it may go the other way where it doesn’t affect leading to you not care. Often, the impact may be indirect. Lose enough customers and management usually downsizes to offset the reduced revenues.
Another problem that is usually not mentioned is how crowdfunding is taxed. I am not a tax expert, but it’s something you should check with your taxing agency (the I. R. S. and applicable state or local tax agencies in the U. S.) as you don’t want to be hit with an unexpected tax bill. In addition, sales tax may need to be taken into account as well. In the U. S., the crowdfunding site may issue you a 1099-K which they also send to the I. R. S. In addition, you may be subject to self-employment taxes in some cases. Also, unless the crowdfunding campaign is a qualified non-profit, you as a backer cannot count your pledge as a charitable contribution. In addition, if the non-profit offers something in exchange, you may have to deduct the fair market value of the item from your contribution. When I worked for a non-profit, we had a fundraising dinner. The tickets were $50, but the fair market value of the meal was $25 so you could only claim $25 as a charitable contribution, not the full $50.
A downside to crowdfunding is when a company decides to use it on a regular basis to raise money. I will be doing a post on two companies that I really like that are overusing Kickstarter campaigns. They don’t get the concept of backer burn-out. I mentioned this in a post last month. I wouldn’t recommend a company doing crowdfunding campaigns more than once a quarter (every 3 months) and ideally, maybe only twice a year. I have seen crowdfunding campaigns that raised enough to fund the next three campaigns, but the company opted to do the three campaigns on roughly a monthly basis.
If you haven’t checked out Stonemaier’s Kickstarter Lessons, go to https://stonemaiergames.com/kickstarter/full-list-chronological/. I only recently started reading through them, but he has some great points and suggestions.