Do You Have to Pay Tax on Lottery Winnings?

Winning the lottery is a good thing in every respect. The workload is very manageable and the amount is usually well worth it, also because there's no tax on lottery winnings to pay.

At least not right away. However, you should also be aware of some tax particularities in connection with games, gambling and lottery winnings, especially when it comes to large winnings.

In principle, there is no tax on gambling winnings in Germany. The reason for this, however, is not a general tax exemption for betting and lottery prizes that the legislature deliberately grants, as is commonly assumed. On the contrary: in Germany the state does not award prizes to any of the seven types of income that are taxed in the various forms of income tax. They are therefore, as the technical jargon puts it, merely "not taxable." In fact, this distinction is irrelevant - at least for casual players. You don't have to pay tax on lottery winnings.

Regular large winnings - tax on lottery winnings

The picture is different, however, when the winnings flow regularly and in large amounts. They become a genuine source of income, comparable to the income of employees or the self-employed. For example, some professional players were taken to court because in recent years they regularly and successfully took part in poker tournaments, cash games or online activities. In many cases the court not only confirmed the tax authority's claim to income tax on the winnings but also considered the levying of trade tax appropriate. The professional participants concerned were to be regarded as entrepreneurs and bear all the consequences of income tax and trade tax. So here you do have to pay tax on lottery winnings.

Tax on lottery winnings - get tax advice!

But even if you don't have to worry about paying tax on one-off lottery winnings, you still have to reckon with the medium- to long-term tax consequences. The reason: you don't have to pay income tax on bets or lottery winnings, but you do have to pay tax on the income generated by winnings in the following years. Conclusion: lottery winnings can generate taxes in subsequent years from the income earned on those winnings. For example, if you win the Eurojackpot, that win is tax-free. Returns from investing the winnings, however, generally are not. In that case you indirectly have to pay tax on your lottery winnings.

If, for example, you use the winnings to buy real estate and earn rental income from it, you have to pay tax on that rental income. The same applies to all other taxable income, from capital gains (such as interest or dividends) to business profits from acquired investments or companies.
If you win the big lottery, you should therefore think very carefully about how to invest that money in a tax-optimized way over the medium term. From a tax perspective, it is normally recommended to consult a professional (a wealth manager or tax advisor). That way you're always on the safe side and don't have to expect any unpleasant surprises.