If you are a backer for causes via a crowdfunding platform, you have choice of backing projects listed on a general crowdfunding platform, such as Kickstarter, or on a platform specifically for charitable / non-profit causes, such as Just Giving.
The platform question is important, because it aligns to how you see yourself as a backer for causes, and legal and tax implications for both you and the charity/non-profit differ between platforms.
- Understand the tax and accounting implications of raising money for a cause via a general crowdfunding platform or a specific platform for charities / non-profits.
- If the funds are classified as a gifts and not donations, then backers can’t claim a tax deduction.
Understanding what type of causes can be listed on Kickstarter
“Kickstarter cannot be used to raise money for causes, whether it’s the Red Cross or a scholarship, or for “fund my life” projects, like tuition or bills.”
“Money for causes” is a bit of a grey area because I would have categorised some projects listed on Kickstarter as cause projects, for example, helping to fund a minority dance class trip to some destination, or helping to save the local drive-in. Although not linked to a charity, I would argue that this falls into the greater category of causes.
As a backer for charitable causes, what is most important to me is get the highest impact from my money – for both the project creator and myself. Although general crowdfunding platforms use terminology such as “pledge”, the transaction’s legal and tax implications, for both me and the project creator, are not immediately clear.
Indeed, if the project creator is not a registered charity, the pledge is most likely a gift or even income from a sale, depending on the type of rewards offered.
If the reward is tangible, commensurate in value to the reward level, and has an external marketplace, then the transaction is a sale.
If the reward is intangible or a token reward, then it is classified as a gift, unless the project creator is a registered charity. And if it is deemed a gift, then the backer cannot claim a tax deduction.
Considerations for choosing a charity / cause platform
I think choosing which projects to back on which platforms comes down to the following:
- which platform will give me the most transparent results with regards to impact achieved and how the funds will be used?
- is the project for a a single cause / impact, a specific project for a local community and not a large scale charity programme?
- to what extent do ancillary rewards, such as postcards, t-shirts, or other novelty items, matter to me when I support a charitable cause?
- how important is it to support local causes versus causes internationally?
- which platform has clear legal and tax implications, for both the project creator and myself?
I am weary of backing charitable / non-profit causes via a crowdfunding platform, and prefer to use JustGiving. My reasoning is two-fold:
i) my pledge is not tax deductible. In the UK, donations to charities are tax deductible, and the Gift Aid programme helps charities generate more donations and be more tax efficient. I have surety of mind that my donation a) will bring in more money to the charity via the Gift Aid programme and b) my donation will be included in my tax return, whereas I doubt that HMRC will classify a pledge to a Kickstarter project as a donation.
ii) my pledge is at a pre-determined reward level, with higher reward levels offering ancillary products that I am personally not interested in. This may be a platform issue, in that higher pledge levels should come with a commensurate increase in rewards, but I think that the ancillary items detract from the cause. I would rather my whole pledge go towards the cause, instead of partially to T-shirt manufacturing.
That being said, a charitable cause may get increased visibility via a general crowdfunding platform, and there are some projects that can’t be easily separated between being charitable or a future business. All in all, make sure you understand what you are backing, and what the implications are of the transaction.