I remember Professor Geoffrey Lanning in my first tax law course in law school, explaining that a base premise under the Internal Revenue Code (the “Code”) is that gross income includes all amounts received from any source, unless there is a specific exclusion provided elsewhere in the Code.

Crowdfunding is a recent phenomenon in which one engages in the funding of a project or cause by gathering on-line contributions, many of them small, from a large group of contributors. All of us in Detroit remember the crowdfunding drive of a few years ago to provide an automobile to a Detroit resident (known in the media as the “Walking Man”) who walked dozens of miles every day to and from work, because he could not afford transportation. Other examples of the use of crowdfunding have been to raise capital for community development projects, the arts, technology and business purposes.

In many instances, it has been used as an alternative to venture capital funding.

As was the case with the Walking Man, often times the contributors received nothing in return but the satisfaction of helping. In other instances, small rewards of some type are provided and sometimes there is the promise of a return of the contributions with interest if a campaign is successful. Equity interests might also be issued for contributions.

Since there are no pertinent cases or Internal Revenue Service rulings on the issue, one must look to general principles of the tax law to determine whether the proceeds from crowdfunding are included in gross income for the purpose of income taxation.

In a recent information letter, the IRS weighed in on this topic and concluded as a general rule that money received without an offsetting liability, such as a repayment obligation, that is neither a capital contribution in exchange for stock or some other equity interest nor a gift, is includable in income.

The IRS position would be that funds raised from crowdfunding would generally be includable in income if they are not: