You will have to pay taxes to the State Tax Service for winning a car or smartphone: why a "free" prize can cost the winner a lot of money

A car in a promotional draw, a new smartphone for winning a contest, a tourist trip from a company partner, or a cash prize in a lottery – for most Ukrainians, such winnings are associated with a pleasant bonus. However, not everyone thinks about the fact that receiving a prize may have tax consequences.

Ukrainian tax legislation provides that winnings and prizes in most cases are taxable income for individuals. At the same time, the taxation procedure depends on what exactly the person received – money or property, who is the organizer of the event, and whether they act as a tax agent. Below we analyze which winnings are taxable, who pays the taxes, and why sometimes a "free" prize can cost the winner a considerable amount of money.

Which winnings are taxable

The Tax Code of Ukraine classifies taxable income of individuals not only as salaries or income from entrepreneurial activities but also winnings and prizes. This includes, in particular:

• winnings in state lotteries;
• cash prizes in contests;
• gifts in promotional campaigns;
• property received in draws;
• valuable gifts from companies or brands;
• tourist trips and certificates.

The taxation procedure for such income is determined by the Tax Code of Ukraine, specifically Articles 164, 167, and 170. In most cases, income in the form of winnings is subject to taxation: personal income tax – 18%; military tax – 5%. The total tax burden is effectively 23%.

Who pays taxes on winnings

The good news for winners is that in most cases they do not need to pay taxes themselves. If a person wins money in a lottery or becomes a winner of a promotional campaign, the organizer of the draw or the lottery operator acts as the tax agent. They calculate the tax, withhold it from the prize amount, transfer the funds to the budget, and report the information in tax filings.

Thus, the winner usually receives the "net" amount after all mandatory payments are withheld.

Many people focus on the prize amount stated in the advertisement but actually receive less. For example, if you win UAH 10,000, the personal income tax on this amount is UAH 1,800, the military tax is UAH 500. You will receive UAH 7,700 in hand.

Winning UAH 50,000: personal income tax – 9,000 UAH; military tax – 2,500 UAH. The actual payout will be 38,500 UAH.

Winning UAH 100,000: personal income tax – 18,000 UAH; military tax – 5,000 UAH. After tax withholding, 77,000 UAH remain.

That is why lawyers advise carefully reading the terms of promotions and contests, as the advertised prize amount does not always match the actual payment.

Non-cash prizes

If a person wins money, everything is relatively simple – the organizer withholds taxes and pays the remainder. A completely different situation arises when the prize is non-cash. For example: a car; smartphone, laptop, TV, tourist trip, service certificate. In this case, the object of taxation is the value of the received property.

To calculate tax obligations, a so-called natural coefficient provided by the Tax Code is applied. Simply put, the tax is calculated not only on the value of the gift itself but on a specially increased tax base.

Imagine a situation: a Ukrainian wins a car worth UAH 1 million. At first glance, it seems that they simply receive a vehicle for free. However, the organizer must determine the taxable income using the natural coefficient and calculate tax payments. As a result, the tax burden can amount to hundreds of thousands of hryvnias. That is why many promotional campaigns specify that the organizers will cover all taxes for the winner. If such a provision is absent, the tax payment issue can become an unpleasant surprise.

Exemption for inexpensive gifts: it is worth remembering that according to the Tax Code of Ukraine (subparagraph 165.1.39), non-cash gifts whose value does not exceed 25% of the minimum wage (calculated monthly) established on January 1 of the reporting year are not taxable.

Contests on social networks

In recent years, draws on Instagram, Facebook, TikTok, and other social networks have become increasingly popular. Bloggers and companies regularly offer subscribers smartphones, electronics, certificates, cosmetics, tourist trips, and cash prizes. From the perspective of tax legislation, there are no fundamental differences between such contests and classic promotional campaigns.

If the organizer conducts the contest officially, they must also act as a tax agent. However, this area often raises questions regarding the proper documentation of prize transfers and reporting such operations.

Is it necessary to file a tax declaration?

In most cases – no. If the organizer or lottery operator has already acted as a tax agent and paid the necessary taxes, the individual usually has no additional obligation to declare such income. However, lawyers recommend keeping:

• documents confirming receipt of the prize;
• property acceptance-transfer acts;
• confirmation of tax payment by the organizer;
• official rules of the promotion.

These documents may be needed in case of inquiries from tax authorities.

Common mistakes made by winners

Experts highlight several common mistakes. One is ignoring tax consequences. Many people believe that a winning is a gift that is not taxable.

The second mistake is inattention to the terms of the promotion. Winners do not always read the rules of the draw and do not know who pays the taxes.

The third mistake is lack of documents. After receiving the prize, people often do not keep supporting documents.

The fourth is misunderstanding the specifics of non-cash prizes. Cars, apartments, electronics, and tourist trips most often raise questions about taxation.

What does judicial practice say?

Taxation issues of winnings, gifts, and other non-cash income have repeatedly been the subject of administrative court cases. Although most disputes do not concern lotteries as such but the definition of additional benefits and tax agent obligations, the legal positions formed by courts are also important for organizers of contests and promotional campaigns.

In a case regarding the activities of one LLC (case No. 320/4809/23), the Kyiv District Administrative Court considered a lawsuit by the State Tax Service regarding financial sanctions related to online draws that the controlling authority classified as an illegal lottery.

The tax authority together with the Commission for Regulation of Gambling and Lotteries (KRAIL) found that the company's website conducted a draw whose conditions included: a participant deposit of at least 400 UAH, receipt of "lottery tickets" for this, participation in the prize fund draw, and random determination of winners using a randomizer.

Moreover, the activity had signs of a systematic paid game with mass participation, which, according to the controlling authority, corresponded to the features of a state lottery without a proper license. The Supreme Court supported the position of the State Tax Service and KRAIL and established that the company's actual business model contained all key features of a lottery:

• mass nature of the game; presence of a prize (winning) fund; random determination of the winner;
• territorial publicity (online access);
• paid participation through deposit payment.

The court specifically emphasized that a formal change in terminology ("draw" instead of "lottery") does not change the legal nature of the activity if its economic features remain. The court agreed that in fact: the deposit of at least 400 UAH was the participation fee, the "lottery tickets" served as proof of participation, the win was determined randomly, thus the activity had signs of an illegal lottery.

As a result, the court satisfied the State Tax Service's claim and imposed financial sanctions on the LLC in the amount of 104,000,000 UAH fine (equivalent to 16,000 minimum wages at the time of calculation).

This decision is indicative because the court rejected the formal positioning of the product as a "draw," focused on the economic essence of the operations, and recognized the paid online format with random winnings as signs of a lottery. Essentially, the court confirmed the principle: legal qualification is determined not by the product's name but by the real mechanism of winning and payment.

In conclusion, winning a lottery, a promotional campaign, or receiving an expensive gift from a contest organizer is not only a reason for joy but also has tax consequences to remember. In Ukraine, such income is mostly taxed at 18% personal income tax and 5% military tax. In most cases, all necessary payments are made by the organizer or lottery operator, but the winner should carefully review the promotion rules and ensure that tax issues are properly regulated.

Practice shows that the most questions arise regarding expensive non-cash prizes – cars, electronics, tourist trips, and certificates. Therefore, before receiving such a gift, it is worth clarifying who and in what order will pay the taxes so that a pleasant surprise does not turn into unexpected financial expenses.

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