Hosting a giveaway on your blog is a popular way to gain followers and build relationships with sponsors. However, there are tax consequences. There are always tax consequences!
Your requirements as the host vary depending on the value of the prize. If the giveaway prize is valued at $600 or more - or if one person wins multiple giveaways, and the total prizes awarded in the year exceed $600 - you are required to send the winner a Form 1099-MISC.
Check with your sponsor, as they may take care of this for you. If not, the ball’s in your court.
What is a Form 1099-MISC?
This form is purely informational. You submit it to both the winner and the IRS. It lists the cash value of the prize so the IRS can expect to see that amount on the winner’s income tax return for that year.
To complete this form, you need the winner’s name, address, and social security number. You are required to send them the Form 1099-MISC by January 31 of the following year (e.g., prizes won in 2012 will be reported on Forms 1099-MISC, due January 31, 2013). The IRS provides Forms 1099-MISC for free on their website, but be sure to order early to avoid delays. The IRS expects to receive their copy of the Form 1099-MISC by February 28.
As the host, it’s your responsibility to make sure that the giveaway is set up legally. The issue here is avoiding accidentally turning your giveaway into a lottery. Many states keep their lotteries tightly-regulated, so it’s best to avoid unintentionally veering into lottery territory.
A lottery as three components: the prize, chance, and consideration. The prize is what you are giving away. Chance is the element of luck involved in winning the prize. Consideration is something of value. For example, if you buy a lottery ticket, you are exchanging money (consideration) for the possibility (chance) to win big bucks (prize). You need to ensure that your giveaway does not have all three of these elements. Since you will likely have a prize and chance, you need to avoid having those who enter exchange consideration for the chance to win.
What does that mean?
Unfortunately, this is a gray area. In the case of a lottery ticket, consideration is clearly the money that you spend to buy the ticket. Things are less-clear in blog territory. For instance, could your readers' time be considered consideration? If you ask entrants to go to Facebook and “like” your page, is that worth something? This isn’t clear.
The best practice for those hosting giveaways is to let people enter the contest for free first. Make the first entry a comment on that blog post. You can always offer additional entries in exchange for Facebook “likes,” or Twitter mentions. As long as the first entry is free, you’ve eliminated consideration and made sure your giveaway is not a lottery.