Crowdfunding For Writers — Handle With Care

Crowdfunding money

By Tax Credit on Flickr

Producing a well-edited, professionally designed book takes money.  If you don’t have spare change lying around, how do you finance the upfront costs?

Many writers are using crowdfunding to raise money for editors and designers as well as production and marketing expenses.  In crowdfunding, the writer seeks contributions on-line.

A number of websites provide a platform for the writer to pitch the project and collect donations.  Kickstarter and Indiegogo are probably the most well known, but there are others which claim to specialize in helping authors.  Some offer services beyond crowdfunding, such a market testing, advertising and printing. (Watch out for the fees on the extra services.) Some charge a percentage of the amount raised, while others charge a flat monthly fee.  Some are “all-or-nothing” which means the author does not collect anything unless a certain dollar target is achieved.  Others do not have a minimum threshold, and the author keeps whatever is raised.

Here are a few examples.

I have never used any of these services, so do not consider my listing them to be any endorsement or guaranty of integrity or success.

As a writer, I find crowdfunding to be an exciting resource.  As a lawyer, I find it full of dangerous pitfalls.  Here are some thoughts on avoiding these pitfalls.

When you solicit money from other people DO NOT CALL IT AN INVESTMENT.  If you are selling an investment, then you are selling a security (like a stock or bond) which is subject to a complex array of federal and state laws.  Yes, even if you are raising $2,500, you are selling securities which require registration and the preparation of detailed disclosure statements.  There are exemptions from the registration requirements, particularly if you are taking investments from family and friends only and in small amounts. But if you will be soliciting funds from anyone and everyone on an online site, you should call the funds contributions, not investments or loans.

Do not say the donations are tax deductible.  Many people hear the word “donation” and assume it is tax deductible.  Not the case.  Unless you are a non-profit entity which has applied for and received tax-exempt status from the IRS, the donations are not deductible by the donor.

crowdfunding taxes

By Simon Cunningham on Flickr

The contributions you receive may be considered taxable income.  From what I have read, the IRS has not yet decided whether funds raised through crowdfunding are non-taxable gifts or taxable income.  The more cautious approach is to consider them taxable income because they are funds obtained in pursuit of a business venture.  If you have deductions for expenses at least equal to the donations received, you may offset this income.

Below are a few helpful articles about crowdfunding.


All photos used under Creative Commons Attribution License

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