Are Prizes and Awards Taxable?

By Intern: Zach Croix

Under Supervision: Stephen Zogal, EA

Date: 7/23/2025

Congrats! You received a prize! You say your thanks to the audiance and now comes the question "Is this taxable?".

In the United States, the IRS generally views most prizes and awards as taxable income. However, the tax landscape for these windfalls is governed by specific Internal Revenue Code sections and numerous court interpretations. U.S. tax law, specifically I.R.C. § 61(a), broadly defines gross income as “all income from whatever the source derived.” This expansive definition includes, but is not limited to, income from wages, business profits, interest, dividends, and prizes and awards. This means unless a specific exception applies, the fair market value of any prize or award, whether in cash or property, must be included in the recipient’s taxable income for the year it is received.

While the general rule is clear, several critical exceptions exist, primarily outlined in I.R.C. § 74. To qualify for exclusion from gross income under I.R.C. § 74(b), an award must meet three stringent conditions. Achievement in Specific Fields, Unsolicited Selection, or Direct Transfer to Charity/Government. The award must be made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement. This criterion focuses on awards that acknowledge significant contributions to society rather than mere luck or participation in a contest. The recipient must have been selected without any action on their part to enter the contest or proceeding. This distinguishes awards for true merit from prizes won in competitions or lotteries that individuals actively pursue. Crucially, the prize or award must be transferred directly by the payor to a governmental unit or a qualified charitable organization (as defined in I.R.C. §§ 170(c)(1) or (2)) at the recipient's designation. If the prize or award meets any of these three exceptions, it can become a non-taxable item. This exception is commonly utilized by recipients of awards like the Nobel Prize, Pulitzer Prize, and various other prestigious academic or humanitarian awards.

The taxability of prizes and awards has been the subject of numerous legal challenges and interpretations.

Let's start with a story about a NFL player with a similair situation.

In the tax court case Paul V. Hornung v. Commissioner, (1967) Paul Hornung, a Green Bay Packers football player, was awarded a new Corvette and a substantial cash prize for being named the Most Valuable Player in the 1961 NFL Championship game. The key issue was whether the value of the Corvette was taxable income. Hornung argued the car was a "gift" and thus excludable under I.R.C. § 102 (which generally excludes gifts from gross income). The Tax Court rejected this argument. It determined that the Corvette was not a gift because it was given as an award for services rendered (playing football and being MVP), rather than out of "detached and disinterested generosity." The court emphasized that a gift requires a donative intent, which was absent here as the award was tied to Hornung's performance. The court ultimately held that the Corvette was taxable income, as it was a prize directly related to his professional activities. This case cemented the principle that awards tied to performance or an expectation of benefit to the payer are generally taxable.

The case of Rogallo v. United States is significant in determining the taxability of prizes and awards, specifically in its interpretation of I.R.C. § 74(b). This section provides an exclusion from gross income for prizes and awards made primarily in recognition of certain achievements, such as scientific, charitable, or civic. In Rogallo, the taxpayers received a monetary award from NASA for their development of the "parawing," an invention they created on their own time and without any application or requirement for future services. While the Rogallos may have felt their award from NASA was a pure honor, the court ultimately determined it was not excludable from their gross income. The crucial point was that the award was not given simply for the act of invention itself, but rather for the act of contributing the invention to NASA and granting a royalty-free, irrevocable license. This contribution was a prerequisite for receiving the award, making it clear that the payment was not a gratuitous recognition of achievement. Instead, it was compensation for the transfer of rights and the utility of the invention to NASA, thereby failing to meet the strict "primarily in recognition" criteria for exclusion under Section 74(b) of the Internal Revenue Code. This case underscores the importance of the intent behind the award and the I.R.C. circumstances of its receipt in determining its taxability.

When the taxability of a prize or award is disputed and lands before the U.S. Tax Court, the court undertakes a detailed factual and legal analysis. The process generally involves a burden of proof, an examination of facts and circumstances, an application of I.R.C. Sections, precedent, a consideration of "De Minimis" and "Gift" arguments while applying substance over form to the situation. The U.S. tax code generally subjects prizes and awards to taxation, but specific exceptions, particularly the charitable transfer rule for highly recognized achievements under I.R.C. § 74(b), provide avenues for avoiding personal tax liability.

Recognizing when a prize is truly a "gift" versus taxable income, often requires careful consideration of the facts and the guidance of tax professionals.

Visit Spring Tax Advisors

To Zach Croix, Thank you for your incrediable contributions to Spring Tax Advisors! We hope your journey leads you to great contributions and your dedication to educatoin leads you to a greater understanding and wisdom. Zach contributed to Spring Tax Advisors as a Summer Intern in 2025. He is due to start his studies at A &M University in Texas this Fall.