How are sweepstakes winnings taxed?

Gambling winnings are treated differently depending on where you find yourself in the world. In the UK, New Zealand, and Australia, any form of gambling winnings is not subject to tax. In the US, however, it’s a different story.

Despite sweepstakes technically being outside the remit of gambling in the US, any winnings are considered taxable income, and today, we will be deep-diving into the specifics so that you have a good idea of what to expect if you land a big jackpot in a sweepstakes game.

Sweeps and their appeal

In the US, it’s fair to say that casino gaming and sports betting are two markets that have experienced significant growth in popularity over the last decade. Within the space of a few years, online gambling went from a largely unregulated black market to something that generates billions of dollars’ worth of tax for multiple states throughout the US.

However, due to each state having a variety of different rules and regulations, some places attract a larger audience for sweepstakes than others. In California and Texas, for instance, online gambling is not legislated or regulated.

There have been multiple attempts by lobbyists to change these laws, but unlike other US states, California and Texas already have large businesses and economies, and do not rely on the tax income generated by gambling.

While this is likely to change, given the immense potential tax base that exists and the substantial amount of money the industry generates, it has paved the way for the rise of sweepstakes platforms.

They offer an experience that is essentially identical to that of conventional casinos, with the key difference being that you use on-site currencies and tokens to place your wager. By offering sweepstakes coins, tokens, and prizes, sweepstakes operators circumvent legislation that would otherwise classify them as online gambling providers. However, for those who win money at a sweepstakes site, the tax legislation remains the same.

Listening to the experts 

In any industry, it is essential to take a step back and listen to the experts' opinions. Sweepstakes platforms are no different.

While they may not have the same appeal as the overarching presence of the online casino industry, they are still developing a respectable niche for themselves. Websites such as sweepschaser.com have tasked their experts to review and rate the highest-rated sweepstakes casinos currently available.

While there’s no definitive approach that they all follow, there are variables that are considered industry standards, such as gaming range, payment methods, site security, licensure, and quality of customer service.

Those in the industry who possess a strong understanding of how iGaming works are often a reliable source of information regarding taxable income from sweepstakes. However, it is always advisable to consult a specialist in the field if you are unsure about specific elements.

So, how does it work? 

All winnings are taxable in the US. When reporting the income, it falls into the category of “ordinary income” with the IRS. Generally speaking, regardless of the state you are in, it is considered taxable income; however, Texas does not have an income tax, so winnings would not be subject to it in this specific example.

As is the case with any other gambling winnings, you report the full amount. If you win $500, you report it; if you win a voucher worth $500, you report it, too. If the amount exceeds $600, the operator must issue a form that clearly highlights the winnings and the jackpot amount.

Sweepstakes platforms toe the line when it comes to winnings. If they pay out specific amounts of cash, they could technically fall into the remit of a conventional gambling platform, meaning they would have to adhere to a raft of legislation. In some cases, they might not be able to operate in the state at all.

For instance, in Utah, sweepstakes are allowed; however, if they pay out real money prizes, they would be considered a lottery, which would technically render them illegal and prohibit their operation within the state.

Conclusion

If you do land a decent win on a sweepstakes platform, the best course of action is to explore how the tax legislation works in the state or province where you reside. Consulting a tax specialist is the best choice, especially if you have multiple wins or if you have cashed your winnings and then used them to gamble again.

It is often a paper trail that can become confusing, so ensure you keep some of your winnings aside. Usually, a quarter of any winnings is a good starting point. Always ensure that you maintain a record of how much you win, whether it comes in the form of a prize, voucher, or cash.

Unlike other areas of tax, sweepstakes winnings are not too difficult to understand. They fall under the remit of standard gambling winnings, which are considered income.

So, it’s not too different from doing a standard tax return. One tip I would recommend is to set aside more than is necessary. This means that once that time of the year comes around again and you have paid your tax, you should have a surplus that you can use to treat yourself.