Won a prize? You may not always have to pay tax. It depends on the correct classification of the win. Here is how to know what you are entitled to
Imagine that you entered a reality TV competition, took part in a lottery, or won a prestigious literary prize, and now you are wondering: how much tax is paid on winning a prize in Israel, and how much will you get to keep? The answer is not as simple as it may seem, and it often surprises people, for better or worse.
The taxation of prizes and lotteries is one of the most disputed areas of tax law in Israel. Until mid-2003, winnings from gambling, prizes and lotteries were considered a “windfall” and were therefore fully exempt from tax. This changed significantly when Amendment 134 to the Income Tax Ordinance (Section 2A) came into effect in July 2003.
Today, the taxation of gambling, lotteries and prizes in Israel is regulated by the Income Tax Ordinance and the withholding tax regulations. It affects tens of thousands of Israelis every year, from Lotto and Toto winners to athletes, from authors to participants in television competitions.
Whether the win is from a weekly lottery or a prestigious prize worth millions of shekels, the tax rules are the same, but the result may be completely different
What does the law say?
As of July 1, 2003, Section 2A was added to the Income Tax Ordinance. It provides that “income or gain originating from gambling, lotteries or prize-bearing activity” is also subject to tax. This amendment was part of a broader trend of expanding Israel’s tax base.
It is important to understand: the section applies only to receipts originating from one of the sources expressly listed in it: gambling, lotteries or prize-bearing activity. In other words, not every payment received as a prize will be taxable. Whether tax applies to a prize in specific circumstances depends directly on the source of the income.
Receipts originating from another source of income, such as a business or profession, will be taxed according to the relevant source of income, and not under Section 2A. This distinction is central to the entire issue, and we will expand on it below.
How is a prize classified?
The main conflict in this area is: when is winning a prize considered income from prize-bearing activity, and when is it considered business income, or not taxable income at all? The answer depends on one essential question: was the win influenced by the winner’s personal advantage, or was it a random win that did not depend on the winner’s skills?
In the Baruch Meshulam v. Tel Aviv 1 Assessing Officer case, the court established guiding tests for distinguishing between the two situations. Following this case law, the Israel Tax Authority published several circulars, including Income Tax Circular 21/90 (“Scholarships, Grants and Prizes as Income”), Operational Instruction 19/90 (“Prizes for Agents and Dealers as Income and Withholding Tax Obligation”) and Income Tax Circular 17/2004 (Taxation of Lotteries, Gambling and Prizes), which explained the personal and territorial taxation principles of the section.
According to the case law and the circulars, prizes can be classified into three main categories:
Category | Feature of the win | Classification for tax purposes | Tax rate |
Prize based on personal advantage | The win results from skills, knowledge, expertise or a business interest | Income from a business / profession (Section 2(1)) | Marginal tax according to tax brackets |
Prize from a lottery / random win | The winner is not required to have a personal advantage; all that is required is to “join an existing event” | Prize-bearing activity (Section 2A) | 35% |
Prize received in a personal capacity | The prize is unrelated to business activity and is not included in Section 2A | Not considered taxable income | Full exemption |
The tests developed in case law for distinguishing between a non-business prize and a business prize include:
- Does the participant have a business interest in taking part in the competition to promote their business and publicize their expertise?
- Was business or research work required as a condition for participation?
- Is the participation part of the winner’s regular professional activity?
If these questions generally point to a business context, the prize is more likely to be classified as business income subject to marginal tax. If not, it is more likely to be classified as prize-bearing activity (35%) or as a prize that is not taxable at all.
Tax exemption on a prize: how much and when?
It is important to know: a tax exemption for lotteries and prizes in Israel is not automatic. It depends on the correct classification of the win and on meeting the conditions of the order that sets the exemption threshold.
Not every prize classified under Section 2A will be subject to full tax. The law grants a tax exemption, but it operates according to a special mechanism known as the “tapered exemption,” which is set out in the Income Tax Order (Determination of Amount for Income or Gain from Lotteries, Gambling or Prize-Bearing Activity), 5763-2003.
As of January 2024, the exemption amount is 33,840 ₪ (reduced from 50,000 ₪ in the latest update).
Prize amount | Taxation |
Up to 33,840 ₪ | Full tax exemption |
Between 33,840 ₪and 67,680 ₪ | Partial exemption, according to the “tapered exemption” mechanism |
Above 67,680 ₪ | Tax of 35% on the full amount |
Numerical example: how does the tapered exemption work?
Assume you won 40,000 ₪:
- The prize amount exceeds the exemption by 6,160 ₪ (40,000 – 33,840)
- The exemption is “reduced” by the excess amount and decreases to 27,680₪ (33,840 – 6,160)
- The taxable amount: 12,320 ₪ (40,000 – 27,680)
- The tax payable: 4,312 ₪ (12,320 × 35%)
Please note: no exemption is granted for prizes exceeding 67,680 ₪, and the tax rate will be 35% of the full amount. In addition, surtax under Section 121B of the Ordinance may also apply on top of this tax.
Withholding tax on prizes: who withholds it and how does it work?
In Israel, tax collection on prizes is carried out through withholding tax, by virtue of the Income Tax Regulations (Deduction from Payments for Gambling, Lotteries or Prize-Bearing Activity), 5763-2003.
This means that the entity paying the prize, and not the winner, is responsible for withholding the tax and transferring it to the Israel Tax Authority before the prize is transferred to the winner.
When the prize is not monetary (a car, vacation, etc.), the paying entity determines its value for withholding purposes, but the assessing officer retains the right to change that determination.
Examples of paying entities:
- A television production company (game show, reality show)
- Mifal HaPais with respect to Lotto, Toto and lottery winnings
- Any business entity that pays a prize as part of its activity
Obligations of the paying entity under the regulations:
- Withholding the tax, at the rate under Section 124B of the Ordinance + surtax under Section 121B where applicable
- Payment to the Israel Tax Authority by the 16th of each month for the previous month (Form 0102)
- Filing an annual report, Forms 0801 and 0856, by March 31 each year
- Providing confirmation to the winner, Form 0857, by March 20, upon request
- Checking debts, the paying entity verifies that the winner has no debts to the state before transferring the prize
It is important to know: withholding tax does not conclude the winner’s reporting obligation. Under the regulations, the recipient must include the prize amount in their income tax return.
In our professional view: why is the classification of the prize critical?
Misclassification of a prize may cost the winner 35% of the prize amount, which they will be required to pay as tax, instead of benefiting from a full exemption, partial exemption or lower tax rates.
A question we are often asked is: what is the tax rate on a reality TV prize? The answer is unequivocal: 35% on the full amount, with no entitlement to any exemption.
For example: winning a reality TV competition (“Big Brother,” “Master Chef,” “Survivor”) is subject to full tax at a rate of 35%. The reason is that when a person enters a competition, they do so with the conscious purpose of winning a prize, and therefore the win is not a “windfall” but the result of intentional participation.
By contrast, many prizes are controversial by their very classification. The taxation of Israeli athletes who win international prizes, and the taxation of academic and scientific prizes in Israel, are among the more complex issues in this field. This is because in many cases it can be argued that the prize was awarded for personal achievements only, and not as part of, or as a result of, any business activity. If this argument is accepted, it may result in a full tax exemption.
Examples of this type of prize:
Academic and scientific prizes: Israel Prize, Wolf Foundation Prize, Dan David Prize, E.M.N. Prize.
Sports prizes: Israel Sports Award, Rhythmic Gymnastics World Championships, Maccabiah, Grand Slam events in judo and tennis, World Judo Championships, Basketball World Cup, World Aquatics Championships, World Series of Poker, and more.
Literary and art prizes: Sapir Prize, Bialik Prize, Gefen Prize, Bernstein Prize, Leah Goldberg Prize, Tchernichovsky Prize, Agnon Prize, Yehuda Amichai Prize, Rechter Prize, Young Artist Award, Cinema Art Award, and many others.
Most of the professional opinions we provide examine precisely this question: whether a receipt received as a prize can be recognized as a prize received in a personal capacity, thereby saving the winner a significant tax payment.
What should you do after winning a prize?
If you won a prize, whether in a competition, a lottery or a professional award, here is what you should do:
- Check the classification of the prize before receiving the money: is it a random prize, a business prize or a prize received in a personal capacity?
- Do not assume that once tax has been withheld at source, your obligations are complete. You may still be required to report the prize personally.
- Keep full documentation of the circumstances of the win, the nature of the competition and the nature of your participation.
- Check eligibility for a tax refund on a prize. If tax was withheld from you unlawfully, you may request a refund up to 6 years from the date of the win.
- Seek professional advice. For significant prizes, a professional opinion may save tens of thousands of shekels.
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is composed of professionals with years of experience at the Israel Tax Authority, alongside experience in leading firms and law offices, and brings together legal and economic perspective.
Our team of experts specializes in the taxation of prizes, lotteries and prize-bearing activity, and provides professional opinions for winners in competitions, literary prizes, sports events and lotteries. We would be pleased to help you classify the prize correctly, legally save tax and avoid unnecessary tax payments.
For advice on the taxation of prizes and lotteries, including checking eligibility for an exemption, professional opinions on prize classification, representation before the Israel Tax Authority and tax refund applications, contact us today.
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FAQ
How much tax is paid on winning a prize in Israel?
The tax rate on prizes classified as “prize-bearing activity” is 35%. However, there is a full exemption for winnings up to 33,840 ₪ (as of 2024), and a partial exemption for winnings between 33,840 ₪ and 67,680 ₪under the “tapered exemption” mechanism. Prizes originating from business activity will be taxed according to the regular tax brackets.
Is winning a reality TV competition (Big Brother, Master Chef, Survivor) taxable?
Yes. Winning reality TV competitions is subject to full tax at a rate of 35%, because the participant chooses to join the competition with the intention of winning a prize, and therefore the win is not considered random. The tax will usually be withheld by the production company before the prize is transferred to the winner.
Who withholds the tax on a prize? Do I need to take care of it myself?
The tax is withheld at source by the paying entity, such as a production company, Mifal HaPais, etc. However, withholding tax does not exempt you from including the prize amount in your annual income tax return. It is recommended to verify with a professional that the taxation was handled correctly and at the correct rate.
Can I receive a tax refund for tax collected from me on a prize?
Yes, in certain cases a tax refund may be available, for example if the prize was incorrectly classified as taxable, or if excess tax was withheld. A refund application must be submitted within 6 years from the date of the win, and it must be proven that excess tax was indeed collected.
What happens if I did not report a prize I received?
Failure to report taxable income may result in penalties, late-payment interest and an assessment for unpaid tax. In serious cases, criminal sanctions may apply. It is recommended to seek professional advice even after the fact in order to regularize the matter with the Israel Tax Authority.
