Taxation, Immigration Laws Need to Catch Up with Crowdsourcing

Don Tennant

In a recent blog post, "Time for IT to Put Crowdsourcing in Its Bag of Tricks," I probably came across as being enamored with the idea of crowdsourcing. I appreciated the inclusiveness of it, and I saw a great deal of potential for crowdsourcing to be used in ways that help people who are the victims of natural disasters and other calamities, and who are in desperate need of a source of income. But after speaking with the CEO of a company that's approaching crowdsourcing strictly as a for-profit venture, I'm much less enamored.


The CEO is Alex Edelstein, and his company is CloudCrowd, a San Francisco-based start-up that he co-founded in March 2009 with Jordan Ritter, who previously co-founded Napster. Edelstein is also on the board of, a non-profit organization that facilitates microfinancing in developing countries. So he has solid credentials in the non-profit realm of global workforce development, where crowdsourcing stands to be of substantial social benefit. That may be where it's best kept, but the crowdsourcing genie is out of the bottle, and it sees dollar signs.


Like's Mechanical Turk before it, CloudCrowd is betting that crowdsourcing is not only a viable for-profit business model, but an extremely lucrative one as well. CloudCrowd appears to have more of a gold-rush mentality in its approach, however, and is eager to stake a claim without too much formality.


Whereas Mechanical Turk states explicitly in its Participation Agreement that workers "agree to provide us with true and accurate information," and that they agree not to "impersonate any person or use a name that [they] are not legally authorized to use," CloudCrowd takes a far more laid-back approach.


CloudCrowd boasts on its website that it has a "proprietary virtual workforce." That workforce is, in reality, nothing more than people on Facebook using what for now is just a CloudCrowd Facebook app. And CloudCrowd is perfectly happy to have the members of its proprietary virtual workforce falsify their identities when they sign up. Edelstein put it this way:

In general, people are already members of Facebook, or even if they don't like Facebook, they can create a separate identity on Facebook for purposes of working on the [CloudCrowd] system.

That seemed a bit odd, and I wasn't sure how that would mesh with the fact that CloudCrowd pays its workers through PayPal. But Edelstein didn't see a problem:

From our point of view, we need a PayPal e-mail address to pay you, the worker. But you can give us any e-mail address you want for your main account. So you can go to Facebook and create a Facebook account. At that point Facebook doesn't know about your PayPal address, so there's not really any issue there.

I'm not so sure, given that anybody can open a PayPal account under a fake identity. True, if you do that you can't link it to a bank account or a credit card, but you can certainly use it to receive money and to pay for goods and services. All of this raises any number of questions, not the least of which is the matter of income tax.


Until one of CloudCrowd's independent contractors makes $600, the company doesn't have to ascertain his true identity and report his income, so there's nothing to stop a worker from creating a new identity whenever he approaches the $600 mark. Edelstein said no one had reached that level as of Dec. 31, and he couldn't say whether anyone has reached it since. In any case, he acknowledged it would be safe to say that not many people have hit that threshold. So it's not too much of a stretch to conclude that very little, if any, tax has been paid on the total income received by CloudCrowd's workforce of 15,000 to 20,000 people in the six months that CloudCrowd has had paying clients. Edelstein declined to disclose those income numbers.


It's also the case that if CloudCrowd can't verify the identities of its workers, it can't verify that those workers aren't illegal aliens. That's not good for CloudCrowd, given that Section 8 of the Federal Immigration and Nationality Act states, "Anyone employing or contracting with an illegal alien without verifying his or her work authorization status is guilty of a misdemeanor."


None of that is to say that CloudCrowd can expect its offices to be raided by federal authorities anytime soon. Edelstein noted that the Feds have bigger fish to fry, and he's right. But he's also right when he says that things can't keep going like this forever:

There's no question, as it becomes a bigger ecosystem and more business gets done over the Internet, the taxing and immigration authorities are going to start paying more attention. Who knows? There may be changes to regulations. Our goal is to build CloudCrowd into a huge, global ecosystem, and to the extent we're successful at that, I'm sure it'll bring new regulatory problems, just like it has for other successful companies.

The bottom line is Edelstein's response to my question as to whether he thinks current taxation and employment laws are equipped to deal with the emergence of crowdsourcing:

I think it's fair to say no. There's also the global cross-border issue. Current taxation laws are really not prepared to deal with a massive amount of work being done across borders in small amounts.

Until the laws catch up, there's going to be a Wild West dimension to the crowdsourcing-for-profit phenomenon. And a lot of us will long for the days when profit wasn't the driver of the crowdsourcing experience.

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Add Comment      Leave a comment on this blog post
May 5, 2010 9:32 AM R. Lawson R. Lawson  says:

Interesting you brought this up.  Although I don't see this as a major issue at this point in time, it is certainly something to think about. 

I believe that ClowdCrowd should expect a visit from the IRS at some point because they aren't exempt from tax laws - and the people doing business with them and getting paid through PayPal also are not exempt.  If they aren't reporting this as income, it can come back to haunt them - especially if the income is substantial.

I suspect most people doing business through ClowdCrowd aren't making a living at it and are probably subsidizing their current income.

I noticed another trend yesterday.  I forwarded a link to my wife (who is a translator) for a job opportunity which I thought looked promising: 

As it turns out, this company and many others are using "CrowdSourcing" to get work done FOR FREE.  I'm not sure how many people feel like donating their knowledge to a for-profit company for free - but my wife certainly wasn't interested.

Open source is one thing because you can use the fruits of your labor, even if you aren't getting paid for it.  But what EventNote is doing is quite another because they have exclusive rights to what you are producing.  They are probably some startup trying to find free labor - but I find the whole concept of internships (unless the pay is fair) and now this quite troubling.

May 11, 2010 4:32 AM Mark C. Mark C.  says:

CloudCrowd has the same provisions in its worker agreement that Amazon has, and requires that workers provide accurate information when registering.

They are also in compliance with IRS requirements that companies submit 1099s for any contractor who earns $600 or more.


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