Do you need to pay income tax on your winnings?
Is your lottery win taxable?
One of the major questions lottery players always ask is if they have to pay income tax on their lottery wins. This is a question that is answered by another question: What country do you live in? Yes, the country you live and play your lottery in is crucial to whether or not you would have to pay taxes on your lottery winnings. Some countries collect income tax on lottery winnings and some don’t. As such, you may, or may not, get to keep all of your winnings.
As an example, let’s take a look at winning the lottery in Canada versus winning the lottery in the United States. In Canada, when you win a prize on a lottery, it is yours, free and clear. You never have to pay income tax on any lottery winnings including contests, bingo, draws, or other games of chance. Lottery winnings are not considered income and therefore are not subject to any tax. You get to keep the full amount of what you win, every single penny. The only time you would pay tax is on any interest made from the winning funds.
Now, in the United States, you will have to pay income tax on your lottery winnings. The lottery operator will hold back the tax and pay you out the remaining prize money. You legally have to report the full amount of winnings for each year on your income tax form. However, unlike Canada, players in the United States can also declare as an expense all the money they have spent to be able to gamble.
Taxes that are payable for wins over $5,000 is 25%, or an entire one quarter of your prize. And if your prize pushes you into a higher tax bracket you may end paying more than 25% of your winnings. Gambling expenses include the actual cost of wagers (ticket purchases) plus all expenses incurred in connection with the conduct of the gambling activity, such as travel to and from a store to buy your ticket. You can't deduct gambling expenses that are more than your winnings to try to increase your expenses on your income tax form. On top of that, States can also tax lottery wins which means you may have to pay out more taxes from your winnings, leaving you less money to buy that house or car.
Like Canada, the United Kingdom also does not take any income tax from your winnings. And Germany also does not take any income tax for lottery wins, but in Russia, winnings taxed.
For those countries who do not tax lottery wins, players get to keep all the money they win.
But for those countries that do collect tax, players end up receiving less, sometimes a lot less, of their win. Whether it is fair or not is debatable. But each country has its own way of viewing lottery wins and whether you have to pay, or not to pay, income tax on your lottery winnings is simply a geographical reality depending on where you live.