Funded Now, Taxed Later: The Hidden Costs Of Crowdfunding And Debt Cancellation

In recent years, there has been a surge in the number of devastating climate disasters and emergencies. During the aftermath, the majority of the support for rebuilding is increasingly coming from crowdfunding platforms.

As of February 11, “more than a million donors in all 50 states and 160 countries have donated more than $250m to support fire relief and recovery efforts, about $20m more than GoFundMe collected after all other disasters last year, including Hurricanes Helene and Milton,” The Guardian reports. 

While crowdfunding platforms like GoFundMe can serve as a valuable resource for vulnerable populations during difficult times or emergencies, users should beware about the hidden costs when the time comes to pay taxes. But how can recipients balance their immediate needs versus any potential long-term repercussions?

Priscilla Suggs, a Certified Public Accountant based near Austin, Texas, supporting small businesses and families nationwide with tax planning and preparation, sat down with AFROPUNK to discuss the tax implications around crowdfunding and debt cancellation. 

“The taxability of GoFundMe proceeds for the recipient depends on the nature of the contributions and the purpose of the campaign,” says Suggs. “Generally, crowdfunding revenues, including those from platforms like GoFundMe, are includible in the recipient’s gross income unless they fall under specific exceptions.”

Suggs noted “three main exceptions where crowdfunding proceeds may not be taxable:

• Loans that must be repaid;
• Capital contributed to an entity in exchange for an equity interest; and
• Gifts made out of detached and disinterested generosity without any quid pro quo.”

“The third exception is particularly relevant for many GoFundMe campaigns,” Suggs continued. “If the contributions are made as a result of the contributors’ detached and disinterested generosity, and the contributors do not receive or expect to receive anything in return, the amounts may be considered gifts. In such cases, these amounts may not be includible in the gross income of the campaign organizer or the beneficiary.”

“However, it’s important to note that not all contributions to crowdfunding campaigns are automatically considered gifts,” added Suggs. “The Internal Revenue Service (IRS) evaluates each situation based on its specific facts and circumstances. Contributions that are not the result of detached and disinterested generosity may be taxable.

How is this reported? The crowdfunding site or a payment processor may be required to file and issue you a Form 1099-K. Since December 31, 2021, this threshold “is met if during a calendar year, the total of all payments distributed to a person exceeds $600 in gross payments, regardless of the number of transactions or donations,” per the IRS.

Suggs also cautioned about potential surprise tax bills that could stem from canceled credit cards and student loans. Here’s two key things she wants you to know. “If you get a Form 1099-C, don’t ignore it—canceled debt could mean a tax bill is coming, and not all forgiven debt is taxable, so before you panic, check if you qualify for an exclusion.”

“When debt gets canceled, whether it’s credit card debt or student loans, the IRS often considers it taxable income—meaning you could owe taxes on the forgiven amount,” Suggs explained. “This applies to many types of canceled debt, including credit cards, personal loans, and some private student loans. If a lender forgives $600 or more, they’re required to send you a Form 1099-C, Cancellation of Debt, which you’ll need to report on your tax return (IRC Section 61(a)(12)).”

“However, not all canceled debt is taxable,” qualified Suggs. “The IRS provides exclusions for certain types of forgiveness, like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness, which are tax-free under federal law (IRC Section 108(f)). The same goes for some loan discharges due to disability or death. But if a private lender forgives student loan debt, or if you settle a credit card balance for less than what you owe, the canceled amount is usually considered income, and you may owe taxes on it.”

You don’t need to panic if you’re dealing with canceled debt because there are ways to navigate this dilemma. Suggs advised to “check for exclusions – If you were insolvent when the debt was canceled (meaning your debts exceeded your assets), you might qualify for the insolvency exclusion and avoid taxes on some or all of the forgiven amount (Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness).” In addition, “review Form 1099-C carefully – errors happen. Make sure the amount listed is correct and that you actually had a debt canceled.” 

Most importantly, Suggs wants to ensure you have a plan for tax liability in place. If you’re the recipient of crowdfunding contributions that the IRS doesn’t consider a gift and if you have debt that’s been canceled, “be prepared for the possible tax bill when you file. Start saving and plan to set up an installment payment plan with the IRS if the additional income results in amounts owed.”