IRS Code Section 74: Prizes, Awards, and Charity Transfers

Under Internal Revenue Code Section 74, the tax rules for prizes and awards start from a simple position: if you win it, you owe income tax on it. That applies to cash winnings from a game show, the fair market value of a car from a raffle, a cash stipend attached to a professional honor, and almost everything in between. A few narrow exceptions exist for prizes transferred directly to charity, certain employee achievement awards, and Olympic and Paralympic medals, but each carries strict conditions that disqualify most winners who assume they qualify.¹

How Prizes Are Valued and Taxed

Cash is easy. A $10,000 lottery payout is $10,000 of additional ordinary income, taxed at your marginal rate.

Non-cash prizes are where people run into trouble. You owe tax on the fair market value of what you received, meaning what a willing buyer would pay a willing seller in an open transaction.² Win a car with a $45,000 sticker and you owe income tax on $45,000, even though no cash ever changed hands. That is why winners of large physical prizes sometimes sell or refuse them: the tax bill has to be paid in real money.

The payer’s reported value is not always the last word. If a sponsor issues a 1099 using manufacturer’s suggested retail price, but the actual market value is lower, you can report the lower figure. Back it up with comparable sales, dealer quotes, or an independent appraisal, and keep the documentation in case the IRS asks.

The Charity Transfer Exclusion Under Section 74(b)

Section 74(b) lets you exclude a prize from income if it goes straight to charity, but only when all three of these conditions are met:¹

The prize recognizes achievement in a religious, charitable, scientific, educational, artistic, literary, or civic field. This targets honors like the Nobel or Pulitzer, not sweepstakes or contests.
You did nothing to enter. If you applied, submitted work, or performed services that triggered the award, this condition fails.
You designate a qualified charity or government entity in writing before the award is presented, and the payer transfers it directly. You cannot receive the money or property first.

If you are surprised by an award and want to use this exclusion, return it before spending, depositing, or using it, then submit the written designation referencing Section 74(b)(3) and naming the recipient charity.³ Because the prize never enters your income, you cannot also claim a charitable contribution deduction for the transfer.

Employee Achievement Awards

Awards from your employer are generally taxable wages. Section 74(c) creates a limited exclusion for employee achievement awards that meet the requirements of Section 274(j). The award must be tangible personal property given for length of service or safety achievement and presented as part of a meaningful ceremony. Cash, gift cards, vacations, event tickets, and securities do not qualify.⁴

Length-of-service awards require at least five years of service, and the employee cannot have received a similar award in the prior four years. Safety awards cannot go to managers or to more than 10 percent of eligible employees in a year.

Even when the award qualifies, the tax-free amount is capped by the employer’s cost:

Non-qualified plan awards: up to $400 per employee per year.
Qualified plan awards: up to $1,600 per employee per year, but only under a written program that does not favor highly compensated employees, and the average cost of all qualified plan awards for the year cannot exceed $400.

Anything above the applicable cap is wages, subject to withholding.¹ Small items like a holiday ham or company-branded merchandise may escape tax entirely under the de minimis fringe benefit rule in Section 132(e), which covers benefits too small and infrequent to reasonably track.

Olympic and Paralympic Medals

Section 74(d) lets U.S. athletes exclude both the value of medals won at the Olympic or Paralympic Games and any prize money paid by the U.S. Olympic and Paralympic Committee for those competitions.⁵

The exclusion phases out for high earners. If adjusted gross income for the year (calculated before applying the exclusion) exceeds $1,000,000, the benefit is fully lost. For married individuals filing separately, the cutoff is $500,000. Endorsement deals, appearance fees, and sponsor bonuses tied to Olympic performance stay fully taxable no matter your income, because those payments do not come from the Committee.

Lump Sum or Annuity for a Large Prize

Many large prizes, especially state lottery jackpots, let you choose between a lump sum and an annuity paid over decades. Under the constructive receipt doctrine, having an unrestricted right to demand money can trigger tax on the full value even if you choose the installments, unless a specific rule protects you.

Section 451(j) does exactly that for “qualified prizes.” When it applies, choosing the annuity means you pay tax only on each installment as you receive it. Three conditions must be met:⁶

The prize is payable over at least 10 years.
The lump-sum option is exercisable within 60 days of becoming entitled to the prize.
The prize does not relate to past services or require substantial future services.

Most state lotteries structure their games to satisfy these rules. If you take the lump sum, the full discounted amount is taxable in the year you receive it. If you take the annuity, spreading the income can keep you in a lower bracket each year.

Reporting, Forms, and Withholding

Payers of prizes have their own filing obligations, and those create a paper trail attached to your Social Security number.

Non-gambling prizes worth $600 or more are reported to you and the IRS on Form 1099-MISC.⁷ You report the income on Schedule 1 (Form 1040), line 8i.³

Gambling winnings use Form W-2G and different thresholds. For payments made in 2026, the minimum W-2G reporting threshold is $2,000. Sweepstakes, lottery, and wagering pool winnings above $5,000 (net of the wager) trigger mandatory 24 percent federal income tax withholding under Section 3402(q). Bingo, keno, and slot machine winnings are exempt from that regular gambling withholding even above $5,000.⁸ Gambling winnings go on Schedule 1, line 8b.

The 24 percent withheld is a prepayment, not a final tax. If your marginal rate is higher, you owe more at filing. If it is lower, you get a refund. Claim the withheld amount as a credit on your return.

A separate backup withholding rule kicks in at 24 percent if you fail to give the payer a correct taxpayer identification number.⁸ Have your Social Security number ready when claiming any prize.

And your obligation to report a taxable prize does not depend on receiving a form. A $400 door prize will not generate a 1099-MISC, but it is still taxable and belongs on your return.⁹

Deducting Gambling Losses and Entry Fees

Under Section 165(d), you can deduct gambling losses, but only up to the amount of gambling winnings you report for the year. Losses can never create a net deduction against other income, and you have to itemize on Schedule A to claim them at all.

Starting January 1, 2026, the One Big Beautiful Bill Act limits the deduction to 90 percent of your gambling losses rather than the full amount. Someone who won $201,000 and lost $220,000 could deduct only $198,000 (90 percent of $220,000), leaving $3,000 in taxable income despite being down $19,000 for the year.

Entry fees for non-gambling contests and sweepstakes are worse off. Before 2018, they could sometimes be deducted as miscellaneous itemized deductions subject to a 2-percent floor. The Tax Cuts and Jobs Act suspended that category through 2025, and the One Big Beautiful Bill Act made the elimination permanent.¹⁰ Entry fees for contests and competitions are not deductible in 2026 or beyond.

State Income Tax on Prize Winnings

Federal tax is only part of the bill. Most states with an income tax also treat prize winnings as taxable, with rates ranging from zero in states without an income tax to as high as 10.9 percent. Roughly ten states impose no state-level tax on prize income, either because they have no income tax or because they specifically exempt lottery winnings. Check your state’s rules early after a large win: some states withhold at payout, and others leave you to make estimated tax payments on your own.

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Office of the Law Revision Counsel. 26 USC 74 – Prizes and Awards
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eCFR. 26 CFR 1.74-1 – Prizes and Awards
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Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income
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Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses
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Office of the Law Revision Counsel. 26 USC 74 – Prizes and Awards
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Office of the Law Revision Counsel. 26 US Code 451 – General Rule for Taxable Year of Inclusion
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Internal Revenue Service. About Form 1099-MISC, Miscellaneous Information
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Internal Revenue Service. Instructions for Forms W-2G and 5754 (01/2026)
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Internal Revenue Service. 1099 MISC, Independent Contractors, and Self-Employed 5
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Office of the Law Revision Counsel. 26 US Code 67 – 2-Percent Floor on Miscellaneous Itemized Deductions