Do Kickstarter Bands Have To Pay Taxes? Accountants Aren't So Sure

In 2011, the agency introduced the 1099-K form. While it doesn't target crowd funding specifically (no, the K doesn't stand for Kickstarter) -- it is meant to keep track of third-party credit-card transactions, such as the pledges that Amazon processes on behalf of Kickstarter. Thus, anyone who raises more than $20,000 or logs at least 200 transactions on Kickstarter is required by the IRS to file the form. Don't think you can weasel out, either, because Amazon reports the information to the government.

The fact that the IRS is quietly accounting for the money raised on Kickstarter is catching some artists off guard -- like Zach Porter of Allstar Weekend, for example. "That is definitely something that I have to look into," Porter says.

In January, local singer-songwriter Ari Herstand raised $13,500 from 222 backers for recording costs -- which means this year he'll have to file a 1099-K. When pressed, he admits that he has no idea what his tax responsibility will be, and Kickstarter provides little information about the subject on its site.

A Kickstarter representative declined to be interviewed for this story, and no one from the IRS would speak with the Weekly, either -- pointing us only in the direction of published material, of which there isn't any yet about crowd funding.

But accountants told the Weekly it's really not clear how musicians should classify this type of money on their tax returns.

In fact, it turns out that Herstand might not even have to pay taxes on his pledges at all.
It all hangs on a philosophical-sounding question: What is a pledge? Is it a sale? That might depend on the reward -- a CD in exchange for a $15 pledge, for instance, might be considered a sale.

Alyce Bonura, of Sherman Oaks-based tax consultants Bonura & Associates, who has worked as an entertainment-industry accountant for 30 years, doesn't believe that to be the case. If a band is raising money to make an album, Bonura says, profit from that work is what counts as income, and that's what the band will be taxed on "after they deduct their expenses: the album-cover designers, the recording studios. All that stuff." The rewards, she argues, could be written off as promotional costs.

"It is not income," Bonura says. "It is either an investment, a gift or a loan," though it's only a loan if there is a contract outlining the terms of such an agreement. If it's a gift, you're not required to pay taxes on it up to $13,000 in value.