Sweepstakes and Lottery Winnings

Here’s a fun topic that is generally not thoroughly researched by the public. If it was, I believe entries for sweepstakes and lotteries would be far less common. Still, the allure of winning that car, home, trip, or cash of your dreams is far too attractive to let some pesky thing like taxes come in between you and your newly found spoils. Right? Well, maybe it shouldn’t be. I’ll explain below.

Lottery

I’ll start with the form of gambling that nearly everyone is aware of…state-sponsored lotteries. A lottery is usually easier for folks to understand. Once you get unearned cash, you must report income. Part of this is because lotteries do a great job of making you aware that you will not keep the total amount of the winnings because federal and state taxes will eat up a portion. If you choose the “lump-sum” option, states tell you what the cash value of the winning are versus the actual total take home amount. Depending on the size of the lottery, the amount you win is likely to be subject to the top federal and state tax rates. If you happen to live in a state without income tax, you may be lucky to be able to avoid state tax but always check your state regulations when it comes to lottery winnings.

Sweepstakes Sweepstakes are a marketing tool for many companies to get you and me to engage with their products or services. Sweepstakes usually do not require purchase…but a purchase of goods might increase your odds of winning. In addition, sweepstakes tend to be “easier” to win than the lottery because, depending on who’s hosting the sweepstakes, less people enter which shifts probability a bit more in your favor. However, unlike the lottery, there tends to be this disconnect between winning a vacation or something like real property and taxes. Let me start by saying anytime you are lucky enough to win the sweepstakes, be ready to pay taxes. When you receive something of value and you do not pay cash for it in a normal buy/sell exchange, the value of the item or service is income to you. The sweepstakes host must report the prize value to the federal government using a 1099-G form.  You will also receive a copy of that 1099-G showing the amount of income you have to report on your individual tax return.

Online, Real-World Example

An example of a sweepstake I’ve seen online that has caught plenty of attention is a giveaway of modified cars. The number of comments from people stating how great it would be if they were the lucky winners of the car is almost scary. While some people may understand the consequences of winning the giveaway, I can assure that many people do not. Every now and then, someone will ask the host of the sweepstakes about the tax ramifications. Smartly, the host will tell the contestant to consult a CPA about the consequences of winning such a sweepstakes. This company also provides cash as additional winnings with the car as well. In response to a question about tax consequences, the host tells the contestant to consult a CPA but also advises the winner to use the cash winnings to help pay any income tax. While the contestant is likely going to need all the help they can get, the $60,000 provided will also be taxed.

By the Numbers

Let’s dig in. Let’s say you enter a sweepstakes for a Lamborghini Temerario. Base price of such a vehicle is $290,000. Let’s also assume that the host provides $90,000 cash in addition. If you were to win the sweepstakes, the total amount of your winnings reported to the government would be $380,000.  Let’s say you fall within the 35% tax bracket for 2026, but your effective tax rate is 30%. Federal tax on $380,000 would be $380,000 x .30 = $114,000 which is already more than the cash you received. You would also need to consider state taxes, if applicable. In Virginia, this income would be taxed at a rate of 5.75% or $380,000 x .0575 = $21,850. Total taxes out of pocket in April would be $135,850. That’s a full $45,850 greater than the cash provided to you by the sweepstakes host.

Conclusion

Sweepstakes and lotteries are fun to enter and, hey, if you don’t play, you won’t win. However, you had better be aware of the value of the prize you are winning, or you may be in for a very large tax bill come April. Or you may need to sell the very item you won to cover the taxes! Keep in mind that the total value of the prize is not always easy to find. Be sure to ask questions if you need to. If you have recently become a lucky winner or are thinking of entering a contest and have questions, feel free to reach out to us at 571-445-0201 or abs@westhighlandtax.com