Aim: To provide a discussion regarding how Tax Practitioners try to find the least burdensome tax rates for clients. Whenever possible, capital gains treatment rather ordinary income treatment is sought since it has a lower rate. Lottery winners are advised to re-consider selling their annuities because they are giving up their chance to acquire lineage wealth. When they sell their annuities, they receive no tax benefit and may have tax trouble later on.
Method: In short, exploring case law, this article takes the reader through the arguments that are made in support of treating lottery/gambling winnings as capital gain.
Result: An argument can be made for treating lottery winnings/gambling winnings as capital gain based on case law.
Conclusion: The tax payer’s arguments for treating lottery/gambling winnings as capital gain would likely not be upheld by the tax courts for public and fiscal policy reasons.