Winning a high-value sweepstakes prize is very exciting... until you have to pay your sweepstakes taxes. In the United States, you need to add the value of the prize to your taxable income, so it's important to ensure that the value is correct.
Prizes with high ARVs can add a significant amount to your taxes. But before you avoid a giveaway because you feel the prize value is too high, keep in mind that you only pay taxes on the fair market value, so the ARV might be irrelevant.
Remember, only sweepstakes scams ask you to pay money to the companies hosting the giveaways. You pay taxes on legitimate sweepstakes prizes directly to the IRS.
Why Are ARVs Sometimes Inflated?
When sponsors set up sweepstakes, they determine the ARV of the prizes they're awarding. But remember that ARV stands for "Approximate Retail Value," and for a good reason: An ARV is just an estimate.
Take, for example, a vacation sweepstakes that's giving away a trip to Las Vegas including airfare, hotel, and event tickets. With this prize, you have three variables to estimate for the ARV:
- The cost of the airfare.
- Nightly costs for the hotel stay.
- Ticket prices.
However, there's a lot of room for variation in the value of these prize elements.
The price for the event tickets changes depending on the date and time of the show you attend. Hotel prices fluctuate depending on factors like when you travel and what else is going on at the time.
Airfare rates are even more volatile. Air ticket prices are seasonal; they can leap in price overnight. Plus, it's impossible to know in advance where the winner will live. Airfare to Las Vegas from, say, Los Angeles is going to have a much different cost than airfare from Hawaii, Maine, or Virginia. And if the winner lives in a remote area, the number of airlines the winner can use is limited, making the prices even higher.
Consider a promotion where the sponsors are giving away a free computer. In this case, when the sponsors set up the giveaway, the computer was worth $2,000. By the time it arrives in the winner's hands months later, its value has depreciated. That same computer is now worth $1,200. High-end prizes like cars depreciate in value even more dramatically with time.
It's difficult to predict what a prize will be worth when the winner receives it, especially for longer-running sweepstakes that could last months or longer.
Sponsors may have other reasons for overestimating an approximate retail value. Entrants tend to get more excited about big sweepstakes, which means that estimating a high value for a prize could make the giveaway more successful for the company hosting it. Plus, the ARV could affect the sponsor's taxes.
Does a High ARV Really Matter?
The good news is that the ARV of a sweepstakes prize is (more or less) irrelevant. United States residents only pay taxes on the fair market value of the prize at the time you receive it. If you feel like your prize value has been exaggerated, you can always dispute the ARV on your taxes.
Sweepstakes taxes are a good reason to be picky when you're entering sweepstakes. If you don't feel like the prize is worth the taxes you'll be paying on its value, it's a good idea to skip that giveaway.
However, if you would be willing to pay the taxes on a reasonable estimate of the prize value but feel the ARV is too high, don't let that dissuade you. If you really do win, proving the prize's true value will make the taxes affordable.