This is the not-so-fun edition of my sweepstakes series that I wasn’t really looking forward to writing … no one wants to think about paying taxes when it comes to sweepstakes. We just want to think about winning! But unfortunately, there’s no way of getting around Uncle Sam, is there?
Keep in mind I am definitely not a tax professional here and I am not trying to give you tax advice. At the end of the year, it would be best if you would speak with the person who prepares your taxes or a CPA to find out exactly how to handle the taxes on your prize wins.
I have done some research online, and here are my findings regarding sweepstakes and taxes:
Prizes Over $600 in Value
If you win something that is at or more than $600 in value, the sponsor is required by U.S. law to send you a 1099 form at the end of the year. Legally, they have to have it to you by January 31st. I have been under the impression for years that if you win a prize that is less than $600 in value, you don’t have to report it on your taxes. However, I have been reading this actually isn’t true and that all prizes with any monetary value, large or small, must be reported on your taxes as “Other Income.” If you win something that is worth less than $600, you probably won’t receive a 1099 from that sponsor, but you still need to have it listed on your taxes as other income.
I cannot confirm this, but I have read that very small prizes like caps, mugs, koozies etc. with the sponsor’s branding may be considered promotional items without any real value, therefore those things *might* be exempt from any taxes.
ARV and FMV
The ARV (Approximate Retail Value) is what the sponsor estimates your prize to be worth. This amount will usually be listed somewhere in the fine print of every sweeps you enter. It is a myth that you have to use this value on your taxes as the amount the prize is worth because most of the time this value is very inflated! Instead, go by the FMV (Fair Market Value). Do your research and find where the prize you won is for sale brand new. If you can find it listed for much cheaper and you can get documentation showing that, you can just use this amount when you file your taxes.
Try to keep good records of your wins and the fair market value of the prizes you win throughout the year so you won’t be caught off guard and unorganized when tax time rolls around.
I would also suggest being fairly selective as to what you enter for if it’s something really expensive. Like for example, would you really want a $6,000 diamond necklace enough to pay taxes on it at the end of the year? On small prizes, the amount in taxes is likely going to be so negligible that you’ll barely notice any difference at all, but with something like this you will feel more of a bite. It’s up to you to decide if it’s worth it.
Again, I am not a tax professional offering you tax advice, so the best thing you can do at the end of the year is go over all this with the person who prepares your taxes.