How Are Prizes One WIns Taxed?
- June 7, 2011
- David Greene
- Comments Off on How Are Prizes One WIns Taxed?
Many people win prizes in various contests ranging from a free dinner to thousands of dollars (or millions in the lottery). Most people think this is free money to them because they did not “earn” it.
However, according to the IRS, they did earn the money because they had to do something to win the prize, if it was only to buy a lottery ticket or fill out a form or entry blank. Furthermore, the IRS takes the position that any money “earned” is taxable.
Pursuant to the tax laws, prizes that you win are considered income, whether cash, merchandise or services (e.g. travel) and are taxable as such. Any income from any source is taxable and, as shown earlier, the tax laws give “income” a very broad definition.
When one wins a prize, at the end of that year he should receive a Form 1099 (if the prize was worth over $600.00) from the sponsor of the contest showing miscellaneous income in the amount of the value of the prize. It does not matter whether the person received cash or credit for merchandise. This income must be disclosed on his tax return and there is a place to list it.