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[Mittens]

I was wondering if anyone had looked into how income from sites like kickstarter or paypal donations or any other kind of money-for-nothing scheme is taxed.

Is it counted as business turnover? Does a company/business need to be set up a certain way to even be allowed to accept money for nothing?

[Capntastic]

I don't get what you mean by money for 'nothing'-- pretty much all monetary transactions are charged for or taxed in one way or another.  What do you think banks do?  What do you think credit card companies do?  Liquidity of assets is an asset in of itself.

It's not so much a 'scheme' as the nature of the financial industry in general, for better or worse.  (Worse, usually).

[Mittens]

No no, by money for nothing i was refering to the donations which dont go to puchasing a product, the just support the efforts of the gamedeveloper

[Capntastic]

Yeah, like 90% of the money goes to the person who made the KS, and the rest goes to KS who takes their fee, and Amazon Marketplace takes another small portion.  Most pledges aren't 'purchases' as such anyways.

[bateleur]

Is it counted as business turnover? Does a company/business need to be set up a certain way to even be allowed to accept money for nothing?

It's income.

Income is like ducks in that respect.

[larsiusprime]

I'm pretty sure it's income that you report on a 1099 MISC form or something like that, if they're paying you personally.

If you have an actual business collecting the money, and you are receiving anything substantial at all, then you should talk to an accountant

[Nix]

It's income. You can't treat the money as donations because you aren't a registered non-profit.

[Xienen]

And trust us, trying to become a registered non-profit game development company is next to impossible...even for a charitable not-for-profit organization like us

[Chris Koźmik]

As everyone already said, it's income You don't have to sell thing or have a product or actually provide anything at all. You could setup a company with the premise that you are a princess locked in a tower and people leave money for you so you are not eaten by a dragon. That's still income and that's all that matters from the fiscal point of view

Note than many/some countires allow you to earn some level of income without a requirement of setting up a legitimate business. And you are usually free from paying taxes if you aren't not too much (and in some cases you might be exempt from showing that income in your fiscal statement, but that's really rare).

Or go to the nearest fiscal government institution in your city and they will explain the local details to you for free

[Richard Kain]

It's income. You can't treat the money as donations because you aren't a registered non-profit.

This, right here. If you aren't a registered non-profit, than you aren't tax-exempt. You will probably need to list that income for estimated annual tax, and send the IRS a check for withholding.

[Nix]

[You will probably need to list that income for estimated annual tax, and send the IRS a check for withholding.

I've never heard of the check bit, but it would be worth looking into. At least make sure you keep enough in savings that you will be able to pay any taxes you owe. Since you're making the money independently of an employer, you get the handly automatically-witheld taxes on a W2.

[Jason Rohrer]

Thought I should clear this up with some tax-law truth.  Everything stated here so far is false.

Personal gifts are NOT taxable in the US!  As the recipient, you don't even have to report them.  If a person gives you more than $13K in a single year, the GIVER has to report the gift (over the gift limit for that giver, for a single recipient), but the recipient still reports nothing.  The IRS may assess a gift tax on the giver.  But the recipient NEVER pays tax on a gift, even if it is a million or a billion dollars.  They don't even have to report it.

But anyway, to keep the IRS out if it entirely (for both people), you just limit your gifts to under $13K per recipient per year.  That means you can give everyone you know $13K each, every year, without reporting it.  And, you personally can receive up to $13K from each person in the world per year without the IRS even having a right to know about it.  I.e., in a very generous world, you could be a billionaire and pay no taxes on the income.  (For each giver, there is a lifetime gift limit... but that's way up there and doesn't apply to what we're talking about).

So, donation buttons, where people are giving you money literally for nothing, as a gift, result in income that is not reported, let alone taxable. 

It has NOTHING to do with 501(c)3.  Those orgs allow the donations to be a WRITE-OFF for the donor.  Yeah, if you're not a 501(c)3, you can't tell people to write off what they give to your donation button, but you still don't count it as income (two separate issues).  Also, 501(c)3's still have to REPORT all their income (whereas people receiving gifts don't).

Returning to Kickstarter, it's a bit of a gray area.  Most people pledge in exchange for rewards, so they're buying something, even if they're paying way more than the reward is worth.  BUT, they're not guaranteed to get their reward... it's really a gift with no strings attached (just a good-faith promise to deliver the reward someday). 

Also, companies can't receive personal gifts (only people can). 

But if you're doing an individual KS, and you have a "you just get our eternal gratitude" funding level, then yeah, I'd say that's a non-reportable gift.

But for the rest of the pledges where you're giving them something in return, it's safest to call it income.  Of course, once you subtract all your expenses to fulfill the project, it's probably not much income (after my $90K Diamond Trust was fulfilled, and every supplier paid, etc, I had less than $6K remaining for myself---i.e., my net income from the campaign).

[UrbanwarfareStudios]

To be safe or to give you plenty of time to use the money (income - expenses = less profits = less tax) schedule your KS to finish at the start of the new financial year therefor you have a whole year to find expenses to use it on. This works well as you don't get the money till it finishes not in drips n drabs

[Tumetsu]

I recommend you to check carefully how your goverment treats kickstarter. Here in Finland someone tried to fund their book printing via Kickstarter but got called by police and had to refund the money. It was unclear by law if they were considered as donations, income or what. Unclear legislation here allowed one to interpret it both illegal or legal and in this case it was considered as donations => illegal. Just a word of warning.