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My understanding of the gift tax is that the donor has to pay the tax, but up to a limit they don't have to pay tax.

I'm a developer. Suppose I offer my software/libraries/blog for free on my site and have the option to donate via PayPal, Patreon, or whatever. Is that money considered a gift and therefore tax free?

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15

Donations, particularly those in the context of you providing a free service (software, libraries, etc.) are a notable grey area in tax code.

Simply naming a button "Donate" doesn't necessarily classify the money transfer as a "gift". The IRS can decide that it's money you're being paid to continue your excellent work/service, making it taxable income (unless you're a registered non-profit organization).

In the instance of Patreon, and many other crowd-funding services, you're providing a certain level of "service" for each tier of donations (such as early access or something, I'm not sure what you're offering), which means they're receiving consideration for their donations, which most likely makes it fall into taxable income (again, unless you're a registered non-profit organization).

State tax law is even more convoluted, and you should consult your tax professional for clarification on your specific situation.

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  • Would having a disclaimer on the donate screen about "this is considered gift for tax purposes" make any difference, or is it just ultimately up to the IRS to decide – Carlos Bribiescas Oct 16 '14 at 16:11
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    It's ultimately up to them. Remember, the IRS tells you how your income is classified, not the other way around. – Noah Oct 16 '14 at 16:15
  • I was hoping it was written such that it allowed it. A grey area is riskier... Thanks for the response! – Carlos Bribiescas Oct 16 '14 at 16:35
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    @CarlosBribiescas Claiming something doesn't make it true. If it did, everybody with a job could save a whole lot of tax by agreeing to work for the minimum wage and accepting an additional monthly gift from their employer. – David Richerby Oct 16 '14 at 17:08
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    You will notice that even major nonprofits are extremely careful to say that PART OF your gift MAY be deductable AS PERMITTED BY LAW, and may or may not go the extra step of suggesting people check with their financial advisors. You aren't claiming deductability, but their caution should warn you that it's unsafe to make any strong statement. – keshlam Oct 16 '14 at 17:52
6

"Donate" buttons are meaningless with regards to taxes. This is payment for something you provided, and you cannot claim that you've received a gift.

Any money you receive in this way is payment for your software. Remember, for gifts - no consideration should have been provided to the donor. Anything for which a consideration was provided - cannot be a gift. In your case the consideration is the software, and it's value is the amount you were paid. Since every person can decide how much to pay you on his own - any payment is for the software, not a gift.

Any money you get is taxable to you, and you cannot claim it as "gifts" without exposing yourself to risks of making fraudulent claims.

Consult a licensed tax adviser (EA/CPA licensed in your State) for a qualified tax advice.

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  • Does that still apply even if the "consideration" would be provided with or without the payment, as in this case? If my 5-year-old niece gives me a drawing she made, and I give her $20 for her birthday, does that mean my $20 was not a gift? Can you suggest an official source that clarifies this? – Nate Eldredge Oct 18 '14 at 15:29
  • @NateEldredge Yes I agree. en.wikipedia.org/wiki/Payment Saying "money you recieve ... is payment" is incorrect because I didn't exchange my software for their money. I am provisioning the service/software free of charge. – Carlos Bribiescas Oct 18 '14 at 18:30
  • @CarlosBribiescas - You are welcome to reject a correct answer here, that's your choice. But to be clear, littleadv's answer is dead on right. In this situation there is no grey area. Money received for what we used to call "shareware" is taxable. Period. The only question is whether the recipient chooses to report it or to break the law. Nate's comment is an absurd analogy. And your WikiPedia link, equally meaningless. If you wish, cite IRS regulations, not a definition of payment. – JTP - Apologise to Monica♦ Oct 18 '14 at 18:37
  • @CarlosBribiescas of course you did. Would they give you the money without you offering the software? – littleadv Oct 18 '14 at 18:38
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    @CarlosBribiescas lawyer? What on earth for? Tax adviser. EA/CPA is enough, no need to pay tons of money to an attorney. – littleadv Oct 18 '14 at 21:58

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