understand the tax implications of Gittip

[chadwhitacre]

This varies by jurisdiction, obviously. In the US, "gifts" from one individual to another are non-taxable up to $13,000 per person per year, for the IRS's definition of "gift." The donor pays a gift tax on amounts over $13,000 per person per year (IRS, Wikipedia). Does this mean you could make $100,000 a year on Gittip from 10,000 people and it would all be non-taxable? As much as possible I want to structure Gittip such that that is possible. If anyone has access to an accountant (@garybernhardt?) it would be valuable to get their professional opinion on the tax implications of Gittip.

[garybernhardt]

I have access to an accountant in the sense that I pay one yearly to do my taxes, but that's it. I think it'd be a good idea to have one to analyze this situation, like, right now, because it's pretty weird. I'd expect it to cost a couple hundred dollars.

[chadwhitacre]

See #83 for questions about Gittip as a 501(c)(3) itself.

[thiloplanz]

It is probably also relevant for tax purposes if the donor is anonymous or not.

Also, what are the roles here? Is gittip user A donating to github coder B? Or is gittip user A donating to Gittip The Charity, and Gittip The Charity is donating to github coder B? (TipTheWeb is using the second model).

[chadwhitacre]

Roles is the question indeed. Interesting about TipTheWeb.

[chadwhitacre]

I think it'd be a good idea to have one to analyze this situation, like, right now, because it's pretty weird. I'd expect it to cost a couple hundred dollars.

@garybernhardt Would you be willing to split the cost? We could do a joint conference call with your accountant and one or two others if they wanted to also join in and share the cost.

[alex]

I can ask some people I know who might have knowledge about this. It'll be free, but I'm not sure this is quite within their domain of expertise. I can do that this weekend.

[chadwhitacre]

Can't hurt. Thanks @alex.

[chadwhitacre]

The view from Germany (via @rodneyrehm on #83):

I talked to a German accountant friend about this. Germany's policy on allowing tax-writeoffs on charity donations requires the recipient to be registered with the German tax office. As participants would not go through the hassle, It would have to be gittip doing that for them.

So in Germany there's currently no way to declare gittip payments as donations - even if you get some American status to cover that. Also the German tax authorities would not accept the payments to gittip as a business transaction, since no actual value was exchanged. Since we're talking peanut-amounts of money, they'd probably just ignore the transactions.

As for the receiving side, you'd have to add the received amount to your declared income.

I guess this makes gittip a little less interesting around here.

[pjz]

You should maybe talk to the https://www.snoball.com/ guys about this; I'm sure they're up on it. At the very least, being able to get some kind of 12-month retrospective report would likely be required. (Also could be fun from a personal point of view - graphs are pretty)

[alex]

So, I didn't get any specific answers here, mostly because I found explaining gittip to someone who knows nothing about open source harder than you'd think. The one key piece of information is that they do not think, for tax purposes in the US, that tips would be gifts.

I am not a lawyer, accountant, or anything else; and even if I was this is neither legal nor accounting advice.

[chadwhitacre]

As @dowski pointed out over lunch, the worst case scenario is that you report your tips as income and pay taxes on them. That's no worse than the status quo.

But now that I think about it, how would you report it? You don't have a W-2 or 1099. Gittip sure as heck doesn't want to have to give you a 1099 or something. You're not Gittip's contractor. We also sure as heck don't want donors to be on the hook somehow for providing paperwork to the people they are giving money to (though if that's the way it went we'd try to automate it).

I seem to have an inkling of some facility w/ the IRS at least for reporting "other income."

[chadwhitacre]

As @garybernhardt says and @alex seems to have confirmed, this is "pretty weird." I'm not sure we're going to come up with a canonical answer apart from living through a tax season or four. I say everyone should talk to their own accountant slash lawyer, and file however they feel comfortable. Then report back: What did you do? Did your government complain?

[chadwhitacre]

OH: "You definitely have the ability to report 'Other income' on your taxes. That's where you're supposed to report income from illegal activities. :)"

[garybernhardt]

1099s aren't required for payments less than $600 per year.

You really, really want an actual answer about this from an
accountant. If the answer is "gittip has to issue 1099s" it's going to
suck. I think that speculating about taxes is worse than nothing. You
can trick yourself into thinking you know the answer.

[chadwhitacre]

Okay, I've emailed an accountant for a quote.

[chadwhitacre]

If anyone else (@mtamizi?) has an accountant they love, let me know and we'll ask them too.

[matin]

@whit537 @garybernhardt Balanced underwrites the tipee as a merchant. That means that Gittip won't have to worry about any tax ramifications. Balanced files a 1099-K for tipee's that receive over $20,000 and 200 transactions from Balanced. It's a requirements Balanced has to follow as a processor.

[chadwhitacre]

@thiloplanz To answer your earlier question: Gittip is currently structured as a pass-through. A "gift tip" is a small, weekly, anonymous, no-strings-attached gift from Gittip user A to Gittip user B. Not sure where exactly a 1099 fits in that.

[chadwhitacre]

See also #136 (should prolly start saying donor and donee instead of tipper and tippee).

[timnguyen]

@whit537 @dowski I agree, I think gifts is the safe way to go for the US. Reporting, I believe, would be: on the donor side the IRS form 709 (http://www.irs.gov/pub/irs-pdf/i709.pdf) likely checked against the 1099k from the processor side (http://www.irs.gov/pub/irs-pdf/f1099k.pdf) [both forms could pretty easily be prepopulated so that the proper parties need to only review and sign].

This means that the minimum required reporting for an individual donor will be $13,000 and, if you're working with a good processor, on Gittip's side will be $20,000 AND 200 donations.

I think the implication of this is that only those projects receiving at least 200 payments and totaling at least $20,000 will be in a position to be checked against donations and should show up on the IRS radar. Also note that 1099k reporting doesn't deduct expenses, so you can calculate that on the tail end and further reduce and tax obligation.

This means for the majority of projects, a donee can record the income as a gift and not have anything happen (because the amount will be so low and there isn't much to check against). For projects large enough, they can record as the donations as gifts and if the IRS audits and, in the worst case scenario, the finds that the gittip donation is income the developer can first offset that income against their recorded expenses then pay the federal tax and then object first administratively and then by filing a lawsuit. See Internal Revenue Manual 5.17.5.16 Civil Damages for Certain Unauthorized Collection Actions (http://www.irs.gov/irm/part5/irm_05-017-005.html)

If the amount of a refund looks like it will be significant enough, it would be possible to prep and support the developer in question to resolve this issue.

Basically, because only very popular projects end up in scope, Gittip should know ahead of time who is at risk for IRS audit because they kind of know at what point a developer will be significant in the eyes of the IRS. This means that it's possible to preemptively work with the developer to mitigate the penalty (i.e. deducting expenses from the gift, help with accountant expenses, figuring other creative ways to assist) and jointly work out the tax situation with an accountant. Beyond that, the developer has two further means of recourse with the IRS.

I think as long as there's proper invoicing/ledgering of the gifts, more time spent on this might be preoptimizing for a problem that is too nebulous to yet justify the immediate cost.

Note I'm not an accountant or a tax attorney, so I'm not offering any of this as tax advice. That being said, I'm emailing a few tax lawyer friends of mine to see if they can give me a more informed opinion and I'll let you know what they say.

[garybernhardt]

OK, so if someone exceeds $20k in a year, Balanced sends them a 1099-K. Which definitely doesn't say anything about tips (at least my 1099-Ks don't). The question then is whether the recipient has to pay taxes, or can somehow claim that giant opaque wad of money as gift income.

[timnguyen]

It's not that the 1099k says anything about tips, but it's effectively the only record of the income to check against. It's why Ebay and the like have to file: so there's something to check what sales taxes are for their sellers.

What I'm also trying to point out is that, unless you're expecting projects to immediately start bringing in >$20,000, for the majority of projects this isn't going to be an immediate worry that we have to guess at and pre-optimize for.

One more thought. I think this donation model is very similar to what the Humble Bundle (http://www.humblebundle.com/) guys are doing. Maybe it'd be useful to connect with them and see how they've resolved their tax issues.

[garybernhardt]

Humble Bundle is an exchange: you give them money and get something. I
don't think they have the unusual gift complication that gittip does.

[timnguyen]

@garybernhardt First the exchange is not an equivalent exchange: some people pay what looks like an exorbitant amount, some people pay next to nothing. That's arguably gifting according to the IRS defintion, especially the higher-end amounts (over a grand for a handful of games?).

You could also argue that they get around this by either 1. explicitly donating to hand-selected non-profits (but they allow donors to choose how much goes to developers) or 2. showing they actually just pay sales tax (but we don't know that)

Second, if you're arguing that the major underlying difference between gittip and humble bundle is that they explicitly allow for the download of something. If all that's needed is the download of some part of the opensource project, what's the problem?

er... and apologies for getting the topic derailed.

[pjz]

I think we should give up on trying to figure this out directly since none of us are accountants or tax lawyers. We should instead, as I think Chad is doing, consult with professional(s) in those fields, preferably ones with experience in this area. Even advice from Balanced should IMO be disregarded, though the number of their tax lawyer/accountant should by all means be paid attention to!

[chadwhitacre]

If I'm not mistaken, @timnguyen is Balanced's ... general counsel?

[matin]

@whit537 yup. I asked him to chime in. @pjz is right though. @timnguyen was trying to help, but we should not be the definitive source. Honestly, I don't want to have the liability of determining your tax situation but happy to give feedback based on our experience and Tim's research. Plus, we will always be biased no matter how hard we try not to be unfortunately.

[garybernhardt]

@whit537, have you gotten an answer from an accountant yet?

[garybernhardt]

I think it's important for (1) gittip the entity to understand what its obligations to the government are, but also for it to understand what donators' and recipients' obligations are, and to have those clearly stated on the site.

[chadwhitacre]

@garybernhardt No, haven't heard back from the accountant I emailed. I just emailed another one.

[paparent]

This is an interesting topic. I'm confused with all that too. I can ask my accountant here too. I'm living in Quebec, Canada... :)

[chadwhitacre]

@jkwade posted this today re: tax documents:

http://blog.balancedpayments.com/1099s/

Doesn't solve the problem for us here, but does give us some insight into how Balanced approaches this. It seems from this post that it would be Gittip's responsibility to file 1099-MISC for U.S. recipients, but for this line: "You made the payment for services in the course of your trade or business." Gittips are gifts, not payment for services.

[jkwade]

Sorry if my post wasn't clear. Gittip isn't responsible for submitting 1099s of any kind to the IRS, Balanced is, and since no Gittipers have reached the $20K/200 trnxs limit we won't be sending them out this year. Does that make sense?

I've updated my post to clarify this confusion. Used Gittip as an example :)

[chadwhitacre]

I spoke with Adam Kelsen, whom I met through Kit Mueller at ShiftPgh. His advice was:

• Communicate as clearly as possible that money given on Gittip is a gift and not a fee for products or services.
• Give the IRS a call (after tax season is over).

Now that we're in U.S. tax season, does anyone want to share the approach they're taking?

[chadwhitacre]

Just met a tax lawyer! :D

http://deaulaw.com/

She's going to look into this (for the U.S.) and get back to me.

[chadwhitacre]

I got a wonderful two-page footnoted memorandum from Anne, which she asked me not to share publicly because it's not intended as advice for the whole community. I can say that, based on her counsel, I'm doing the following:

• Changing the FAQ re: taxes to "IANAL" (basically). This is in line with the Terms of Service, section 8.
• Personally, I am reporting the money I received through Gittip in 2012 as "other income".

[bruceadams]

I'm sad to hear that you aren't treating money received from Gittip as gifts for US federal taxes.

[chadwhitacre]

@bruceadams Yeah, I don't want to do it just because I can get away with it. I'm not out to be a freeloader. If I decide to pick a fight with the IRS I'd like to do so intentionally, out of principle, and at this point that looks to me like a distraction from building Gittip. The IRS will still be around in five or ten years, and I'm sure they'll still be up for a fight then. ;-)

[chadwhitacre]

What are the tax implications of using Kickstarter?

In general, funds raised on Kickstarter are subject to taxes. But how much you owe can vary based on a number of factors, including the deduction of project-related expenses. We highly recommend talking to an accountant or tax advisor. They can guide you through your particular tax scenario in the most advantageous way possible.

We can't offer tax advice, but we have compiled [a guide for financial professionals](http://www.kickstarter.com/help/taxes who may not be familiar with Kickstarter. This is a great thing to give to an accountant. If you're not an accountant, this is not a great thing to read sober.

http://www.kickstarter.com/help/faq/creator+questions#faq_53715

See also:

• http://www.kickstarter.com/help/taxes
• http://www.forbes.com/sites/suwcharmananderson/2012/05/23/kickstarters-sting-in-the-tail-tax/
• http://www.quora.com/Kickstarter/How-do-you-properly-account-for-money-received-from-Kickstarter
• http://ask.metafilter.com/148530/How-are-kickstarter-funds-taxed

[chadwhitacre]

After actually working on filing tonight, it's looking like "Other Income" wants employer info, and there isn't really an employer here afaict. Certainly Gittip, LLC is not the employer in this situation. This H&R Block free file site has something like "Income not reported elsewhere," and it looks like that's what we're going to use, with "Funds received through Gittip.com" as the description.

The closest thing to a heuristic in defining gifts for tax purposes is "a detached and disinterested generosity," which is quoted in Commissioner v. Duberstein at 285:

• https://en.wikipedia.org/wiki/Commissioner_v._Duberstein
• http://supreme.justia.com/cases/federal/us/363/278/case.html#285

The phrase originates in Commissioner v. LoBue at 246:

We have repeatedly held that, in defining "gross income" as broadly as it did in § 22(a), Congress intended to "tax all gains except those specifically exempted." See, e.g., Commissioner v. Glenshaw Glass Co., 348 U. S. 426, 348 U. S. 429-430. The only exemption Congress provided from this very comprehensive definition of taxable income that could possibly have application here is the gift exemption of § 22(b)(3). But there was not the slightest indication of the kind of detached and disinterested generosity which might evidence a "gift" in the statutory sense.

http://supreme.justia.com/cases/federal/us/351/243/case.html#246

If we allow that gifts given on Gittip are an interested generosity, then that actually frees us up to tighten the connection between gifts given and goods delivered. Perhaps those who give more receive special updates or something.

[patcon]

cc: @ribasushi