Lottery: If I win, how much does the taxman take?

BarcelonaAs every December 22nd, thousands of Catalan and Spanish families have high hopes for the Christmas Lottery draw, better known as El Gordo (The Fat One). It's not the lottery that awards the highest prizes, but it's the one most people play. And if you win the first prize, €400,000 per ticket, how much will you get? Well, the Tax Office will also take a cut. In fact, it's common knowledge that the ministry now headed by María Jesús Montero always wins with the lottery.

The Spanish Association of Tax Advisors (Aedaf) has prepared a short guide to explain how lottery prizes are taxed. Law 16/2012 established that, in the midst of austerity measures, lottery prizes should be taxed. In fact, the law itself stipulates that prizes subject to taxation must be subject to the corresponding withholding tax at the time of payment. Therefore, the €400,000 jackpot is not €400,000 net for the winner.

The law stipulated that prizes from the National Lottery, as well as those from the Red Cross and ONCE lotteries, are subject to Personal Income Tax (IRPF), regardless of whether they are in a tenth of a ticket, a fraction, or even a share. This law states that the first €40,000 of the prize is tax-free. That is, smaller prizes and refunds below that amount are not taxed, and the winner receives the full amount. However, for larger prizes, the first €40,000 is tax-free, but the remainder is. And if the amount wagered is less than €0.50, the €40,000, that is, the tax-free portion, must be reduced proportionally to the amount wagered.

So, what are the tax obligations of the winner? Well, whoever is lucky enough to win the lottery will receive the prize money, less the corresponding withholding tax. This withholding tax, which the payer (usually large prizes are paid into a bank account) must pay to the Tax Agency. The winner will have no further tax obligations; they will not have to include the prize in their income tax return. And what is the amount that will be withheld when the prize is received and paid to the Tax Agency? 20% of the prize amount exceeding the first €40,000, which is tax-exempt.

For example, a prize of €100,000 would not be taxed on the first €40,000, with 20% of the remaining €60,000 being withheld and paid to the Tax Agency. Therefore, 20% of €60,000 would be €12,000. The winner, in that case, would have won a prize of €100,000, but the amount they would actually receive would be €88,000; the remaining €12,000 would go to the tax authorities.

Shared Prizes

In the case of the Christmas lottery, it's very common to play a number together: with family, friends, at a club, or in a lottery group. If you're lucky and the shared number wins, the €40,000 tax-free prize must be divided proportionally among all participants, based on the amount wagered. Whoever collects the prize for distributing it among the group members must prove to the tax authorities that they have distributed it among those who hold shares. Therefore, each winner and their percentage of ownership in the winning number must be identified.

In fact, to avoid problems, such as the person physically holding the winning ticket(s) collecting the prize but not distributing it among all participants, each person with a share should be given a document with the name and ID number of the person physically holding the tickets, along with the names of all participants. This information could be sent to the entire group, for example, via WhatsApp. And participants must pay their share before the draw and sign a payment receipt, Aedaf indicates, to avoid later problems that, in more than one case, have ended up in court.

If the prize is large and is paid into a financial institution, the institution should be given a list of participants with their respective percentages of the prize. Furthermore, tax advisors remind us that if the prize is paid to the different participants by bank transfer, Bizum, or cash, this payment must be documented.

What can be done with the money?

When asked, "If you win the lottery, what will you do with the money?", most people say they'll pay off debts. According to a recent survey by the asset management firm eToro, four out of ten Catalans say that if they won the jackpot, they would invest the money in a home. But urban legend says that many winners end up losing or squandering their prize money in a short time. Jaime Martínez Tascón, professor at OBS Business School and director of Inveretik, offers some advice. "You have to stay cool," says this expert, who explains that, first, what's needed is "not to make hasty decisions." "Many people, after winning the lottery, enter a spiral of bad investments, excessive spending, or irrational projects that in some cases have led them to ruin," says this professor. What should be done, he says, is to assess outstanding debts and pay off those that are more expensive, either because of the interest rates or because they are unnecessary debts. And after paying off these debts, the remaining amount should be used to assess the need for the money and the person's risk profile. If the money is needed in the short term, it should be invested in a safe and highly liquid product: a checking account, government bonds, fixed-term deposits, or similar. But if the goal is to invest long-term because there is no immediate need for liquidity, a higher risk can be assumed with other products, but always according to the person's risk profile and with professional guidance. Real estate investments, this expert says, "are a possibility, but attractive investments should be sought; don't buy for the sake of buying."