26 U.S.C. § 74 — Prizes and awards

(a) General rule: Unless another rule in this section, or the rule for scholarships in section 117, says otherwise, money or property you receive as a prize or award counts as part of your taxable gross income. (b) Exception for certain prizes and awards transferred to charities: A prize or award is not taxable if it recognizes achievement in religion, charity, science, education, art, literature, or civic life, and three things are all true: (1) you did nothing to enter the contest to be considered for it; (2) you are not required to do significant future work or services to receive it; and (3) you direct the payor to give the prize straight to a government body or a qualifying charitable organization, instead of to you. (c) Exception for certain employee achievement awards: (1) An employee achievement award (as section 274(j) defines it) is not taxable to the employee, as long as its cost to the employer does not exceed what the employer is allowed to deduct for it. (2) If the award costs the employer more than the employer can deduct, then the employee must include in income the larger of: (A) the part of the cost the employer cannot deduct (capped at the award's value), or (B) the amount by which the award's value exceeds what the employer can deduct. The rest of the award's value stays tax-free. (3) If the employer does not pay taxes at all (a tax-exempt employer), these rules are applied as if the employer could have deducted the amount it would normally be allowed to deduct. (4) A cross-reference points to section 132(e), which excludes small "de minimis" employee gifts from income separately. (d) Exception for Olympic and Paralympic medals and prizes: (1) The value of an Olympic or Paralympic medal, and any prize money the U.S. Olympic Committee pays for competing in the Games, is not taxable income. (2)(A) But this exclusion does not apply if your adjusted gross income for the year — figured without this exclusion — is over $1,000,000 (or $500,000 if you are married and filing separately). (B) When figuring several other tax limits (under sections 85(c), 86, 135, 137, 219, 221, and 469), your adjusted gross income is calculated after applying the medal/prize exclusion in paragraph (1), but before applying the $1,000,000 income cutoff in subparagraph (A).