How do taxes work with donations made to an individual, e.g. for free software I wrote?
Do I report it as income? Is it subject to just the same amount of   taxes (~30%) as regular income? Are there any restrictions on how it   can be used? It is income. You can deduct the costs of maintaining the web page and producing the software from it (have an accountant do that for you, there are strict rules on how to do that, and you can only deduct up to the income if its a hobby and not a for-profit business), but otherwise it's earned income like any other self employment income. It is reported on your schedule C or on line 21 of your 1040 (miscellaneous income), and you're also liable for self-employment taxes on this income. There are no restrictions, it's your money. Technically, who is the donation even being made to? Me, just because   I own the webpage? Yes. This is for the United States, but is there any difference if the   donations come from overseas? No, unless you paid foreign taxes on the money (in which case you should fill form 1116 and ask for credit). If you create an official 501(c) organization to which the donations are given, instead of you getting it directly, the tax treatment will be different. But of course, you have to have a real charitable organization for that. To avoid confusion - I'm not a licensed tax professional and this is not a tax advice. If in doubt - talk to a EA/CPA licensed in your State.
In general, all income is taxable, regardless of the source. If you living in the U.S. -- I don't think you said anywhere where you live -- then if you are donating this money to charity, you would have to declare the income, and then declare a deduction for the charitable contribution. At that point the two would cancel out and the net result is that you wouldn't have to pay any tax on the income, but you can't just leave it off your tax return. Well, even if you donated all of it to charity to that you don't have to pay income taxes on it, you would still have to pay social security taxes, and it would still affect your social security benefits when you retire. If you're saying that the organization receiving the money is itself a charity, as opposed to donating the money to some other organization that is a charity, than you usually have to be registered as a charity with the IRS to avoid income taxes. There are still forms to file to report the income, but you wouldn't have to pay taxes. There are some exceptions to the requirement to register, basically if your organization is very small and for certain religious organizations. Depending on the size of the donation, you may be able to reduce taxes further by donating appreciated assets, such as stock or fund shares that have gone up a lot. That lets you dodge the capital gains tax on redeeming the shares, and if you're donating to a tax-exempt organization they don't have to pay that tax either.  And as @JoeTaxpayer has confirmed, you still get to deduct the current value of the donation, not just the basis value of those shares. So if you're donating anyway, this comes close to being Free Money in exchange for some slightly annoying paperwork. (Yet another benefit of long-term investing!) Of course folks in the top brackets sometimes set up their own tax-exempt foundations so they can decouple taking the tax break from deciding what to do with the donation. "If you are in the US, you legally must file taxes on any income whatsoever.  How much you will pay in taxes, if any, will depend on your total taxable income. Now, for small transactions, the payments are often not reported to the IRS so some people do not file or pay.  The threshold at which they payer is required to send a 1099 to the IRS is $600.  Patreon considers each donation a separate transaction and therefore does not send a 1099 to the IRS unless you make more than $20,000 in a calendar year.  If they do not report it, the IRS will not know about it unless they audit you or something.  However, you are technically and legally responsible to report income whether the IRS knows about it or not. -------- EDIT ------- Note that the payer files a 1099, not the recipient. In order to report your patreon income you will either use schedule C or add it to the amount on 1040 line 21 (""other income"") depending on whether you consider this a business or a hobby.  If it's a business and it's a lot of money you should consider sending in quarterly payments using a 1040-ES in order to avoid a penalty for too little withholding." If I donate $10,000 to charity then I can deduct that $10,000 from my income and not pay income taxes on it.  So if I make $50,000 a year then I will only pay income taxes on $40,000 instead of $50,000 since I donated $10,000 to charity.  This is what is meant when charity contributions are said to be tax deductible. Don't feel like you have to donate to charity.  You owe no one anything.  You do more for others by working (assuming you work in the private sector). If you know of someone personally that is in need of aid then you could give them some help directly.  I find this more effective then blindly dumping money in a bureaucratic, inefficient charity.  I also find there are very few people in need of charity. Personally, I think charity donations are a way for people to feel good about themselves.  They rarely care if their donations are effective. If thinking about it like a business you normally only pay taxes on Net income, not gross.  So Gross being all the money that comes in. People giving you cash, checks, whatever get deposited into your account. You then pay that out to other people for services, advertisement. At the end of the day what is left would be your 'profit' and you would be expected to pay income tax on that.  If you are just an individual and don't have an LLC set up or any business structure you would usually just have an extra page to fill out on your taxes with this info. I think it's a schedule C but not 100% If i am not wrong, any business activities such should be declared on Year End Tax filing. If your friend is going to own that website either it is commercial or nonprofit, he has to declare in the year end taxation. "This page lays down the requirements for an ""unincorporated association"" to pay tax (i.e. any group that's not a registered entity). You pay tax is you make money from: it looks like you don't do any of those, so you don't need to file for taxes. There is another exemption that you don't have to file if it is likely that you would owe less than a hundred pounds taxes, which would also probably apply to you. There are many thousands of clubs and societies in the UK that don't need to register for tax purposes, so you are far from alone. It is probably worth creating an actual club (""Captain Insanity Server Club"") and keeping records of donations and expenses for the server. There isn't any need to legally incorporate or anything like that, though you might try having a separate bank account for it if you can get a free one, so that if the tax authorities ever audit you personally you can show them that the donations you received weren't income to you." Well, that's probably not even all of it. If that stranger did his taxes properly, then he already paid about a third of it to the government because wherever he got it from it was income for him and thus it must have been taxed. Now, the remainder is in your hands and yes, according to US law it is now your income and so now you too, must pay about a third of it to the government, and yes you are supposed to explain where it came from. Be careful giving it to somebody else or it'll be taxed yet again. disclaimer: I am not a US citizen I don't understand the logic in the other answer, and I think it doesn't make sense, so here is my take: You pay taxes on income, not on sales price. So if you put X $ of your own money in the account and it becomes X + Y $ in the future, at the moment of liquidation, you will own taxes on the Y $. Never on the X $, as it was your own (already taxed) money to begin with. The difference between long-term and short-term gains just influences the tax rate on Y. If you donate the gain alone (the Y $) to charity, you can deduct Y from your tax base. So adding Y to your tax base and then deducting Y again obviously leaves your tax base at the old value, so you pay no extra taxes. Which seems logical, as you didn't make any money in the process. Aside from extreme cases where the deductible gain is too large a percentage from your income or negative, I don't see why this would ever be different. So you can take your original 100 $ back out and donate all gains, and be fine. Note that potential losses are seen different, as the IRA regulations are not symmetric. "If you receive a 1099-MISC from YouTube, that tells you what they stated to the IRS and leads into most tax preparation software guided interviews or wizards as a topic for you to enter.  Whether or not you have a 1099-MISC, this discussion from the IRS is pertinent to your question. You could probably elect to report the income as a royalty on your copyrighted work of art on Schedule E, but see this note: ""In most cases you report royalties in Part I of Schedule E (Form 1040). However, if you ... are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C or Schedule C-EZ (Form 1040)."" Whether reporting on Schedule E or C is more correct or better for your specific circumstances is beyond the advice you should take from strangers on the internet based on a general question - however, know that there are potentially several paths for you.   Note that this is revenue from a business, so if you paid for equipment or services that are 100% dedicated to your YouTubing (PC, webcam, upgraded broadband, video editing software, vehicle miles to a shoot, props, etc.) then these are a combination of depreciable capital investments and expenses you can report against the income, reducing the taxes you may owe.  If the equipment/services are used for business and personal use, there are further guidelines from the IRS as to estimating the split. These apply whether you report on Sch. E, Sch. C, or Sch C-EZ.    Quote: ""Self-Employment Income It is a common misconception that if a taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income. All income earned through the taxpayer’s business, as an independent contractor or from informal side jobs is self-employment income, which is fully taxable and must be reported on Form 1040. Use Form 1040, Schedule C, Profit or Loss from Business, or Form 1040, Schedule C-EZ, Net Profit from Business (Sole Proprietorship) to report income and expenses. Taxpayers will also need to prepare Form 1040 Schedule SE for self-employment taxes if the net profit exceeds $400 for a year. Do not report this income on Form 1040 Line 21 as Other Income. Independent contractors must report all income as taxable, even if it is less than $600. Even if the client does not issue a Form 1099-MISC, the income, whatever the amount, is still reportable by the taxpayer. Fees received for babysitting, housecleaning and lawn cutting are all examples of taxable income, even if each client paid less than $600 for the year. Someone who repairs computers in his or her spare time needs to report all monies earned as self-employment income even if no one person paid more than $600 for repairs.""" "A loan is not a taxable income. Neither is a gift. Loans are repaid with interest. The interest is taxable income to the lender, and may or may not be deductible to the borrower, depending on how the loan proceeds were used. Gifts are taxable to the donor (the person giving the gift) under the gift tax, they're not a taxable income to the recipient. Some gifts are exempt or excluded from gift tax (there's the annual exemption limit, lifetime exclusion which is correlated to the estate tax, various specific purpose gifts or transfers between spouses are exempt in general).  If you trade for something of equal value, is that considered income? Yes. Sale proceeds are taxable income, however your basis in the item sold is deductible from it. If you borrow a small amount of money for a short time, is that considered income? See above. Loan proceeds are not income. does the friend have to pay taxes when they get back their $10? No, repayment of the loan is not taxable income. Interest on it is. Do you have to pay taxes if you are paid back in a different format than originally paid? Form of payment doesn't matter. Barter trade doesn't affect the tax liability. The friend sold you lunches and you paid for them. The friend can deduct the cost of the lunches from the proceeds. What's left - is taxable income. Everything is translated to the functional currency at the fair market value at the time of the trade. you are required to pay taxes on the gross amount Very rarely taxes apply to gross income. Definitely not the US Federal Income taxes for individuals. An example of an exception would be the California LLC taxes. The State of California taxes LLCs under its jurisdiction on gross proceeds, regardless of the actual net income. This is very uncommon. However, the IRC (the US Federal Tax Code) is basically ""everything is taxable except what's not"", and the cost of generating income is one of the ""what's not"". That is why you can deduct the basis of the asset from your gross proceeds when you sell stuff and only pay taxes on the net difference." I'm a freelance programmer, reverse-engineer, and network engineer. I do quarterly 1099 filings using a cheap local accounting firm. I did them on my own at first; not that hard.. You deduct from sum the percentage for that earning-tier issued by the IRS.. $500.00 for writing algorithms on a timer? Yikes.. I did topcoder once but it didn't pay much then it was only good for portfolio.. No way I would race to do algorithms for third-world-rate capital.. "BobbyScon's answer really covers this, but perhaps isn't sufficiently explicit.  Reason 1 of the quotation is the largest, by far: Get an Immediate Tax Deduction, but Give Later: You get the tax deduction when the foundation is funded, then make your charitable gifts over time. Having a ""personal"" foundation means that you make donations whenever it is appropriate from a personal finance point of view, but then actually perform the charitable giving in a time that is convenient. So you fund the foundation on Dec. 31, say; that gets the money out of your hands, and out of your taxable income, for the prior tax year.  Then you're not required to do anything else with that money until a time and place where it's convenient to you. In many cases, they set it up not as a foundation but as a Donor Advised Fund.  These are of late becoming extremely popular among the wealthy, largely the ease of setting them up and the above. The other major advantage of a Donor Advised Fund is simplicity in tax season: you have exactly one charitable donation recipient, with one receipt (or one set of them if you donate over time)." According to HMRC's manual BIM42105, you can't deduct expenses of this kind when calculating your profits for corporation tax: No deduction is allowed for expenditure not incurred wholly and exclusively for trade purposes So at the least, the company will have to pay corporation tax on this donation at some point, assuming it ever makes any profits. There's also the risk that HMRC would say that what is really happening is that you are making a personal donation to this person and the company is giving you income to allow you to do it. In that case, you'd be liable to income tax and employees national insurance, and the company liable to employers national insurance. It should then be deductible from corporation tax, though. I would assume that under a certain threshold, HMRC doesn't even want to hear from you, because extracting taxes from you costs them more money than you are going to pay. On the other hand, I cannot find anything written about that subject.  I'd suggest to call them at 0300 200 3300 and ask them. Have the annual cost of the server ready, and tell them that you will stop asking for donations if say 6 months of cost is covered. There may be an official threshold that I was unable to find.  Obviously if you receive £1000 in donations and spend £100 for the server, they will want tax payment. If its £110 in donations and £100 for the server, they will likely not care. If they tell you to register as self-employed, it's not difficult, just a bit of a pain. In that case you'd have to pay tax on your income (donations) minus cost (cost for the server and any other cost).