Introduction: Why Equity Crowdfunding Creates Missed Reporting for Americans
Equity crowdfunding lets an investor in Britain buy shares in dozens of private startups with a few clicks, and for an American each click creates a US reporting question that the platform never mentions. The British tax system rewards these investments generously. The US system, by contrast, treats each stake as a holding in a foreign corporation, tests it under the passive foreign investment company rules and expects it on your annual disclosure forms.
At TaxYork, we prepare US and UK returns for American investors, bankers and company owners who have built portfolios of twenty or thirty startup positions through UK equity crowdfunding platforms. In our experience, almost none of them reported the holdings correctly in the early years. Furthermore, the amounts involved are no longer small. Wealthy investors now commit six-figure sums to single rounds, and the reporting failures grow with the cheques.
This guide explains how equity crowdfunding platforms hold your shares, what the UK gives you, and what the IRS takes back. It then covers the reporting forms, the loss rules and a full case study with real numbers.
What Equity Crowdfunding Means for a US Taxpayer
For US tax purposes, equity crowdfunding is simply the purchase of stock in a foreign private corporation, usually through an intermediary. No special regime applies. Consequently, the ordinary rules for foreign stock govern everything: basis in dollars, capital gain on sale, the passive foreign investment company tests, and disclosure on Form 8938 and the FBAR.
UK equity crowdfunding platforms operate under Financial Conduct Authority rules on crowdfunding, which classify the shares as high-risk investments. Investors must certify as high net worth, sophisticated or restricted before they can commit money. However, none of those certifications addresses US tax status.
Why American Investors Are Often Not Supposed to Be There
Many UK equity crowdfunding platforms ask investors to confirm that they are not US persons. The offers are not registered under US securities law, and the American regime in SEC Regulation Crowdfunding applies only to US issuers on registered portals. As a result, Americans living in Britain frequently invest using a UK address and a UK bank account, and nobody on the platform flags their citizenship.
That gap matters. The platform then issues no US tax documents, performs no passive foreign investment company analysis and reports the account under FATCA only if its onboarding captured your citizenship. Therefore, the entire compliance burden sits with you.
How Platforms Hold Your Shares: Nominees, Wallets and Direct Holdings
The structure an equity crowdfunding platform uses decides which US forms apply. Most investors never check, and the difference is significant.
The Nominee Structure
Most UK platforms hold shares through a nominee company. The nominee appears on the company's register as legal owner, and you hold the beneficial interest. This arrangement keeps the startup's share register manageable and lets the platform vote and sign documents on behalf of hundreds of small investors.
For US purposes, beneficial ownership governs. You own the shares, you report the gain and you carry out the passive foreign investment company test. Moreover, the nominee arrangement itself looks very much like a custodial account with a foreign financial institution, which brings it within the FBAR and the account section of Form 8938.
The Cash Wallet
Equity crowdfunding platforms also hold uninvested cash, sale proceeds and refunds from failed rounds in a client money wallet. That wallet is a foreign financial account in the plainest sense. If your foreign accounts together exceed $10,000 at any point in the year, the wallet belongs on your FBAR, filed through FinCEN's foreign bank account reporting system.
In our experience, the wallet is the single most common omission. Investors list their bank accounts carefully and forget a platform balance of £8,000 waiting for the next round.
Direct Holdings and Share Certificates
Some platforms, and most larger investors, take shares directly in their own names. A directly held share in a foreign company is not a financial account, so it stays off the FBAR. However, it remains a specified foreign financial asset. Our guide to directly held foreign stock on Form 8938 explains how to value and list each holding.
What Britain Gives You: EIS, SEIS and the UK Tax Rules
Most equity crowdfunding rounds in Britain are structured to qualify for the venture capital reliefs, and those reliefs drive investor behaviour. HMRC's guidance on tax relief for investors using venture capital schemes sets out the detail.
Income Tax Relief on the Way In
The Enterprise Investment Scheme gives 30% income tax relief on up to £1 million subscribed each year, or £2 million where the excess goes into knowledge-intensive companies. The Seed Enterprise Investment Scheme gives 50% relief on up to £200,000. Furthermore, the Finance Act 2026 doubled the amounts that companies can raise under the Enterprise Investment Scheme from 6 April 2026, so more and larger rounds now qualify.
Capital Gains Exemption on the Way Out
Shares held for at least three years are exempt from UK capital gains tax when you sell, provided the income tax relief was claimed and not withdrawn. Otherwise, gains on shares are taxed at the UK capital gains tax rates of 18% or 24%. Dividends are rare from early-stage companies, but when they arrive they are taxed at the UK dividend rates of up to 39.35%.
Loss Relief When the Company Fails
Britain also cushions failure. Under section 131 of the Income Tax Act 2007, a loss on subscribed shares in a qualifying trading company can be set against income rather than gains. For a 45% taxpayer with EIS relief, the combined reliefs reduce the real cost of a failed £10,000 investment to £3,850.
Why the UK Reliefs Do Not Cross the Atlantic
None of these reliefs exists in US law, and equity crowdfunding investors feel that gap more than most. The savings clause in the treaty preserves America's right to tax its citizens as if the treaty did not exist, so the IRS taxes your gain in full. Our articles on Enterprise Investment Scheme shares and US tax and SEIS shares for American angel investors explain the mechanics.
Two consequences follow. First, the income tax relief cuts your UK tax bill and therefore the foreign tax credit available against US tax on your salary. Second, a UK-exempt gain carries no UK tax at all, so nothing offsets the US charge of up to 23.8%. Consequently, the best UK outcome produces the worst US one.
The PFIC Problem in Equity Crowdfunding Portfolios
The most expensive US risk in equity crowdfunding is the passive foreign investment company regime. Popular guides claim that operating startups are never caught. That claim is wrong for pre-revenue companies, and pre-revenue companies are exactly what equity crowdfunding platforms sell.
How a Trading Startup Becomes a PFIC
Under section 1297 of the Internal Revenue Code, a foreign corporation is a PFIC if 75% or more of its gross income is passive, or if 50% or more of its assets produce passive income. A startup with no sales yet earns only bank interest on the money it raised. Therefore, 100% of its gross income is passive, and it meets the income test.
Cash also counts as a passive asset. A company that has just closed a £2 million round and holds it in the bank can therefore fail the asset test as well, although goodwill and intangible value often rescue a company with a real business.
The Start-Up Exception and Its Limits
Section 1298(b)(2) provides a start-up exception. A company is not a PFIC in the first year it has gross income, provided it is not a PFIC in either of the following two years. However, a company that spends two or three years building a product before its first sale fails that condition. As a result, the exception protects fast-launching businesses and abandons deep-technology and biotech companies.
Moreover, the taint is permanent. Once a company is a PFIC during your holding period, it remains one for you, even after it becomes a thriving trading business, unless you make a purging election.
What the PFIC Regime Costs on Exit
Without an election, a gain on PFIC shares is an excess distribution. The IRS spreads it across your holding period, taxes the amounts allocated to earlier years at the highest ordinary rate, currently 37%, and adds an interest charge. Consequently, a gain that should cost 20% can cost more than double that.
A qualified electing fund election solves the problem, but it requires an annual statement from the company. In our experience, a founder with 400 crowd investors will not produce one. A mark-to-market election is unavailable, because the shares are not traded on a qualifying exchange.
The $25,000 Form 8621 Exception
One relief genuinely helps small equity crowdfunding portfolios. Under Treasury Regulation 1.1298-1, you need not file Form 8621 for a year in which your total PFIC holdings are worth $25,000 or less on the last day of the year, or $50,000 on a joint return. The exception applies only when you received no excess distribution and sold nothing at a gain.
Importantly, the exception removes the form, not the regime. When you sell at a profit, the excess distribution rules apply in full, and you must file Form 8621 for that year regardless of value.
The US Reporting Forms That Equity Crowdfunding Triggers
Beyond the PFIC analysis, equity crowdfunding produces a cluster of disclosure obligations. Each carries its own penalty, and none depends on whether you made any money.
FBAR and Form 8938
The cash wallet and the nominee account belong on the FBAR once your aggregate foreign accounts pass $10,000. Form 8938 applies at higher thresholds. An American living in Britain files it when specified foreign financial assets exceed $200,000 at year end or $300,000 at any time, or $400,000 and $600,000 on a joint return. The IRS page on Form 8938 sets out the rules.
Valuation is the practical difficulty with equity crowdfunding holdings. Private shares have no market price, so most preparers use the latest funding round price or the platform's portfolio valuation. A reasonable, documented estimate satisfies the form.
Form 926 for Larger Cheques
Wealthy equity crowdfunding investors face a form that smaller investors never meet. Under Treasury Regulation 1.6038B-1, a US person who transfers more than $100,000 of cash to a foreign corporation in any 12-month period must file Form 926. The same applies if you hold at least 10% of the company after the subscription.
The penalty for missing it is 10% of the amount transferred, capped at $100,000 unless the failure was intentional. Therefore, a £90,000 subscription into a single round can carry a five-figure penalty exposure on its own.
Form 5471 Rarely Applies, but Check
Form 5471 generally applies only when you acquire 10% or more of a foreign corporation. Crowd investors seldom reach that level. However, lead investors and angels who anchor a round sometimes do, and the filing then becomes mandatory from the year of acquisition.
Advance Subscriptions, Convertibles and Secondary Sales
Not every equity crowdfunding investment is a simple share purchase. Platforms increasingly use other instruments, and each has its own US treatment.
Advance Subscription Agreements
An advance subscription agreement is a payment today for shares issued at the next funding round, usually at a discount. HMRC accepts these for EIS and SEIS purposes only where the shares must be issued within six months and the money can never be repaid. US law has no specific rule. Most preparers treat the agreement as a prepaid forward contract, so your holding period for long-term gain begins only when the shares are issued.
Convertible Loan Notes
Convertible loan notes are debt until conversion. They do not qualify for EIS relief, and any interest or discount is taxable income in both countries. Conversion into shares of the same company is generally not a taxable event in either system. Nevertheless, the note is a specified foreign financial asset from the day you buy it.
Secondary Market Sales and Takeovers
Some equity crowdfunding platforms run periodic secondary markets where investors sell to each other. A sale there is an ordinary disposal in both countries. Buyers pay 0.5% stamp duty on UK share purchases above £1,000, which earns no US credit and instead adds to basis.
When a larger company acquires the startup for shares, Britain usually defers the gain. The US frequently does not, because the transaction rarely meets the American reorganisation rules. Consequently, you can owe US tax on shares you have not yet turned into cash.
Gains, Losses and the Currency Trap
Every US calculation on an equity crowdfunding investment runs in dollars, and that alone changes the answer.
Measuring the Gain in Dollars
Your basis is the dollar value of the sterling you paid on the subscription date. Your proceeds are the dollar value of the sterling you receive on the sale date. Therefore, a rising pound inflates your US gain and a falling pound shrinks it, whatever happened to the company.
When the Company Fails
Most startups fail, so in equity crowdfunding the loss rules matter as much as the gain rules. Under section 165(g), the US allows a capital loss only in the year the shares become completely worthless. IRS Publication 550 explains the test. In contrast, a UK negligible value claim can be made while the company is still in administration and can be backdated by up to two years.
As a result, the two countries often recognise the same loss in different years. Our article on negligible value claims for US investors explains how to manage the gap.
No Ordinary Loss in America
Britain lets you set a startup loss against income. America does not. Section 1244, which gives ordinary loss treatment on small business stock, requires a domestic corporation, as our guide to section 1244 stock and UK companies confirms. Similarly, the section 1202 exclusion for qualified small business stock never applies to a British company.
Your US loss is therefore a capital loss, deductible against capital gains plus $3,000 a year of other income. Moreover, an American with a tax home in Britain may find the loss treated as foreign source, which reduces the foreign tax credit limit in the same year.
Case Study: Jonathan's Equity Crowdfunding Portfolio
Jonathan is a 41-year-old US citizen and a partner at a London hedge fund. Between 2021 and 2024, he subscribed £180,000 through two equity crowdfunding platforms across 24 companies, all under EIS. The figures below are illustrative and use simplified exchange rates.
What Jonathan Reported and What He Missed
Jonathan claimed £54,000 of EIS income tax relief on his UK returns. His US preparer listed his bank accounts on the FBAR and Form 8938 each year. However, the platform wallets, which peaked at £14,000, and the nominee holdings, valued at £260,000, never appeared on either form.
In March 2023, he also subscribed £90,000, about $111,600, into a single fintech round. That exceeded $100,000, so Form 926 was due with his 2023 return. Nobody filed it, which left a penalty exposure of $11,160.
The Successful Exit
In 2026, an acquirer bought one of his 2021 holdings for cash. Jonathan had subscribed £10,000, then worth $13,800, and received £95,000, worth $123,500. Britain charged nothing, because the shares had been held for more than three years under EIS.
For US purposes, his gain was $109,700. As ordinary foreign stock, that would cost 20% capital gains tax of $21,940 plus $4,169 of Net Investment Income Tax, a total of $26,109, with no UK tax to credit. However, the company had been pre-revenue in 2021 and 2022, earning only bank interest, so it was a PFIC during his holding period. Under the excess distribution rules, the same gain cost roughly $45,000 after the 37% rate and the interest charge.
The Failures
Four of his companies failed, with £30,000 subscribed in total. In Britain, he kept £9,000 of EIS relief and set the remaining £21,000 against income, saving a further £9,450. In America, his loss was $38,400 and was capital only. Furthermore, two of the four companies were still in administration, so the US loss on those could not be claimed until they became entirely worthless.
What We Changed
We reviewed all 24 companies for PFIC status year by year and found six that had been caught. We then amended his returns, added the missing Forms 8621 and 8938, corrected six years of FBARs and filed the late Form 926 with a reasonable cause statement. Because his failures were non-wilful, we used the IRS catch-up route described on our Streamlined filing service page.
Finally, we changed how he invests. He now asks each company for its accounts before subscribing, avoids long pre-revenue businesses and keeps single cheques below the Form 926 threshold unless the filing is prepared in advance.
How TaxYork Can Help
TaxYork prepares US and UK returns for American investors with British equity crowdfunding portfolios. We test each company for PFIC status using its filed accounts, prepare Forms 8621, 8938 and 926, and build the dollar basis records that a sale will need. Additionally, we coordinate EIS and SEIS claims on the UK return with the foreign tax credit on the US return, so the two sets of figures agree.
Our US tax returns for expats service covers the annual filings, and our cross-border planning work reviews an investment before you commit. Where earlier years contain missed reporting on an investment account, a missed FBAR or missed US tax returns, we correct the full history in one coordinated project.
Conclusion
Equity crowdfunding is one of the most tax-efficient ways for a British investor to back startups and one of the least efficient for an American. The UK reliefs lower your foreign tax credits on the way in and leave your US gain uncredited on the way out. Meanwhile, pre-revenue companies can fall into the PFIC regime, wallets and nominee accounts create FBAR and Form 8938 obligations, and large subscriptions trigger Form 926.
However, every one of these problems is manageable when you address it early. Therefore, review your existing portfolio now, correct any missed reporting before the IRS raises it, and test each new company before you invest. An equity crowdfunding portfolio that is properly documented costs far less to own than one that is discovered late.
Contact Us
If you hold startup shares through a UK platform and are unsure whether your US filings are complete, our US-UK specialists can review the whole portfolio. Please book a consultation with the TaxYork team, email hello@taxyork.com or call 020 3488 8606.
Disclaimer
This article provides general information about the US and UK tax position of an American investor in equity crowdfunding as at October 2026 and does not constitute tax, legal, investment or financial advice. Tax rules, rates and exchange rates change frequently, and the correct treatment depends on your personal circumstances. The case study is illustrative, uses assumed figures and simplified calculations, and does not describe a real client. Please obtain professional advice tailored to your situation before acting on any information in this article.