Hosting a giveaway on your blog is becoming increasingly popular. Everyone loves winning, so a good giveaway relevant to the focus of your blog can bring you a lot of traffic.
Unsurprisingly, there are tax consequences. There are always tax consequences!
First things first. Prizes are Income.
In the United States, income is taxable unless specifically excluded (e.g., tax-exempt bond interest). Items of value won in contests, sweepstakes, or lotteries are taxable income to the recipient in the amount of their fair market value at the time they were won. For example, if you won a pair of pinking shears from a craft blog giveaway, their current retail price at the time you received them (i.e., how much you’d pay if you’d bought them rather than one them) is taxable income.
But prizes are gifts! Nope. The IRS defines gifts in the same manner as most of us would – items given out of affection with no requirement of reciprocity or consideration. Your mom may buy you new pinking shears because she loves you, and that’s awesome. No tax consequences there. The craft blogger who sent you the pinking shears you won does not have the same feelings of maternal warmth. The shears are still awesome, but they are now income.
Requirements of the Blogger
Any giveaway with a value of $600 or more must be reported to the IRS and the winner on a Form 1099-MISC. This filing is purely informational but it puts the IRS “on notice” to look for that income to be reported on the winner’s Form 1040.
To issue a Form 1099-MISC, you will need certain information from the winner: full name, address, and social security or tax ID number. It may be easiest to get this information from them before you put their prize in the mail (as they are more likely to be helpful when awaiting their goodies!).
The Forms 1099-MISC are due:
- To the winner: by January 31 of the year after the prize is won.
- To the IRS: by February 28 of the year after the prize is won. To encourage electronic filing, this due date is extended to April 1 if you file electronically.
In addition, there are some “best practices” that aren’t necessarily legal requirements but are still good to implement:
- List the cash value of any prize on your site. Sure, the winner could do a little research to find the retail value, but you likely know as you are dealing directly with whoever is sponsoring the prize, so just help a brother (or sister) out. This is useful even if the prize is less than $600 as any prize of any amount is income to the winner.
- Include language on your blog pertaining to Forms 1099-MISC. Mention that you will be collecting the required information so everyone knows the rules before playing.
Requirements of the Winner
If you receive a Form 1099-MISC, you are required to report the income listed on your annual tax return. The IRS also received a copy of this Form 1099-MISC, so they are waiting for it to show up on your return!
Prizes valued at less than $600 should still be reported as miscellaneous income. As discussed above, they are income in the amount of their retail value when you won them. Hopefully, the blogger listed this value on his or her blog when the contest was hosted, but, if not, contact the store or company that sponsored the giveaway.
This prize income amount should be reported on Line 21 of your Form 1040.
Kinda sound like a buzzkill? IRS audits and penalties are a bigger buzzkill, believe me.
