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Richard, Attorney
Category: Business Law
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Experience:  32 years of experience practicing law and a businessman.
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If an individual wins the lottery for $5 million and agrees

Resolved Question:

If an individual wins the lottery for $5 million and agrees to receive a lump-sum payment of $4 million rather than the annual annuity installments, what is the tax treatment for the loss? Do lottery winnings have a basis? If so, how would you calculate such? Would the lottery annuity have a basis? If so, how would you calculate such? Please provide the IRC or a law suit where this is explained.
Submitted: 4 years ago.
Category: Business Law
Expert:  Richard replied 4 years ago.

Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

There is no loss. The winnings are treated as gambling winnings and fully taxable as ordinary income in the year received. See IRS Bulletin 419 at

The $4,000,000 in cash now rather than $5,000,000 over time is simply based on the time value of money...i.e., the net present value of $5,000,000 received over a period of years is equal to $4,000,000 today. It has nothing to do with taxation of the money you receive. There is no basis; the winnings are simply treated as ordinary income when received.

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