Are Prizes Tax Free?

A vacation awarded by an employer is a form of taxable income.

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Receiving a prize or award can provide a welcome windfall, whether it's cash or an asset of significant value, such as a car or home -- but it can also increase your income tax bill. The Internal Revenue Service usually considers prizes of cash or property to be a form of taxable income. The tax rules for prizes are different depending on the type of prize you receive.

Prizes and Awards

Prizes or awards you win for participating in events like television or radio quiz shows, game shows, lucky number drawings and contests must be included in your taxable income. Prizes must be cited on Form 1040, line 21, which allows you to list "other income." Non-cash prizes are taxable up the fair market value of the prize, which is the amount the prize is worth on the open market. For example, a prize of a vacation package that normally costs $1,000 adds $1,000 to your taxable income. Prizes are taxable only if you actually accept them; if you refuse a prize, you avoid taxation on the prize.


Some prizes may actually be bonuses you receive for exemplary job performance. For example, your employer could give you a vacation or some other type of prize for meeting sales goals. Bonuses are considered a form of taxable income, and your employer is required to withhold a portion of your bonus income and send it to the government to cover your income tax obligation.

Lotteries and Raffles

Lotteries and raffles can result in prizes of cash or property. Lottery and raffle winnings are considered gambling winnings for tax purposes and are taxable up to their fair market value. If you play lotteries and enter raffles but you end up losing money, you can deduct your gambling losses if you itemize your deductions. Gambling losses are only deductible up the amount of gambling winnings. For example, if you spend $1,000 on lottery tickets and win $300, you can deduct only $300 in losses.

Prizes for Accomplishments

If you receive a prize in recognition of accomplishments, you usually have to include the prize in your taxable income. According to the IRS, prizes for religious, charitable, scientific, artistic, educational, literary, or civic accomplishments are taxable, unless you transfer the prize to directly to a governmental unit or tax-exempt charitable organization. If you have to perform services in the future as a condition for receiving the prize, you cannot avoid taxation on the prize.