Foreign Lottery Winnings and US Tax: Are Hong Kong Mark Six Prizes Taxable by the IRS?

Hong Kong’s Mark Six lottery has seen a surge in public interest following the Hong Kong Jockey Club’s announcement in late 2024 of a record HK$150 million jackpot for the 2025 Chinese New Year special draw, a figure that eclipsed the previous high of HK$138 million in 2023. For the estimated 60,000 to 80,000 American citizens and Green Card holders residing in Hong Kong, this raises a critical and often misunderstood question: does a windfall from a foreign lottery trigger a US tax liability? The answer is a definitive yes, and the consequences of non-compliance with the Internal Revenue Service (IRC) can be severe, including penalties, interest, and potential criminal prosecution for willful failure to report foreign income. The US tax system is unique among developed nations in its imposition of citizenship-based taxation (CBT), meaning US persons are taxed on their worldwide income regardless of where they live. This article examines the specific tax treatment of Hong Kong Mark Six winnings under US law, the interplay with the US-Hong Kong Tax Information Exchange Agreement (TIEA), and the reporting obligations that arise from a single lucky ticket.

The Core Tax Position: Foreign Lottery Winnings Are US-Taxable Income

The operative tax position for a US citizen or Green Card holder who wins a prize from the Hong Kong Mark Six lottery is straightforward: the entire amount of the winnings constitutes gross income under IRC § 61, which defines gross income as “all income from whatever source derived.” This includes gambling winnings, regardless of whether the gambling activity is legal in the jurisdiction where it occurs. The US Supreme Court has consistently upheld the broad sweep of § 61, most notably in Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), where the Court held that income includes “accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” A lottery jackpot squarely meets this test.

Distinction from US-Based Gambling Winnings

Unlike winnings from a US-based casino or lottery, which are reported to the IRS on Form W-2G by the payer, Mark Six winnings have no US withholding or reporting by the Hong Kong Jockey Club. The Hong Kong Jockey Club is not a US withholding agent and has no obligation under IRC Chapter 3 to report payments to the IRS. This places the entire onus of reporting on the taxpayer. The IRS has made clear in Revenue Ruling 55-330 that winnings from a foreign lottery are includable in gross income, and no treaty between the US and Hong Kong provides an exemption. The US-Hong Kong TIEA, signed in 2014 and effective in 2016, is an information-sharing agreement, not a double taxation treaty. It allows the IRS to request account and income information from Hong Kong authorities, but it does not alter the substantive tax liability.

The Source Rule and the Foreign Tax Credit

The source of lottery winnings for US tax purposes is generally the location of the lottery operator. Since the Mark Six is operated by the Hong Kong Jockey Club, a Hong Kong entity, the winnings are considered foreign-source income. This classification is critical for the application of the foreign tax credit (FTC) under IRC § 901. If Hong Kong imposes a tax on the winnings—which it does not, as Hong Kong has no gambling tax on lottery prizes—the FTC is irrelevant. However, if a US person were to win a lottery in a jurisdiction that does impose a withholding tax (e.g., the UK’s National Lottery withholds 20% for non-residents), the FTC could offset the US tax liability on the same income. For Mark Six winners, no such offset exists. The entire prize is subject to US federal income tax at the taxpayer’s marginal rate, which can reach 37% for individuals in the highest bracket under the Tax Cuts and Jobs Act (TCJA) rates applicable through 2025.

The Interaction with the Foreign Earned Income Exclusion (FEIE) and Other Deductions

A common misconception among US expatriates is that the Foreign Earned Income Exclusion (FEIE) under IRC § 911 can shield lottery winnings from US tax. This is incorrect. The FEIE applies exclusively to earned income—wages, salaries, professional fees, and other compensation for personal services—and does not extend to unearned income such as investment gains, dividends, or gambling winnings. The IRC § 911(d)(2)(A) defines foreign earned income as “income received from sources within a foreign country which constitute earned income.” Lottery winnings are unearned income, falling under the category of “other income” under IRC § 61.

The Standard Deduction and Itemized Deductions

A Mark Six winner cannot use the standard deduction to reduce taxable lottery winnings to zero. The standard deduction for a single filer in 2025 is USD 15,000 (estimated, indexed for inflation), but it is applied against adjusted gross income (AGI) after all income is included. If a taxpayer has USD 100,000 in lottery winnings and no other income, their AGI is USD 100,000. After the standard deduction, taxable income is USD 85,000. Itemized deductions, such as state and local taxes (capped at USD 10,000 under the TCJA) or charitable contributions, could reduce the tax bill, but only if the taxpayer has sufficient other deductions to exceed the standard deduction. Gambling losses, under IRC § 165(d), are deductible only to the extent of gambling winnings, and only if the taxpayer itemizes. For a Mark Six winner, this means that if they have no other gambling losses, no deduction is available.

The Net Investment Income Tax (NIIT) Consideration

For high-income taxpayers, lottery winnings may also trigger the Net Investment Income Tax (NIIT) under IRC § 1411. The NIIT imposes an additional 3.8% tax on the lesser of net investment income or modified adjusted gross income (MAGI) exceeding USD 200,000 for single filers (USD 250,000 for married filing jointly). However, the IRS has clarified in Notice 2013-69 that gambling winnings are not considered “net investment income” for NIIT purposes. They are classified as “other income” and are subject to the ordinary income tax rates only. This is a rare bright spot: a taxpayer with USD 500,000 in Mark Six winnings and no other income would not owe the NIIT, even though their MAGI far exceeds the threshold.

Reporting Obligations: Forms, Deadlines, and Penalties

The failure to report foreign lottery winnings is not merely an omission of income; it triggers a cascade of reporting requirements under the Bank Secrecy Act (BSA) and the Foreign Account Tax Compliance Act (FATCA). A US person who receives a large lump-sum payment from a foreign source must consider the following forms.

FBAR (FinCEN Form 114) and FATCA (Form 8938)

If the Mark Six winnings are deposited into a Hong Kong bank account, and the aggregate value of all foreign financial accounts exceeds USD 10,000 at any point during the calendar year, the taxpayer must file an FBAR (FinCEN Form 114). The penalty for non-willful failure to file an FBAR can be up to USD 10,000 per violation, while willful violations can result in penalties of the greater of USD 100,000 or 50% of the account balance at the time of the violation. Separately, if the winnings cause the taxpayer’s specified foreign financial assets to exceed USD 200,000 (for single filers living abroad) on the last day of the tax year, or USD 300,000 at any time during the year, Form 8938 (Statement of Specified Foreign Financial Assets) must be attached to the US tax return. The penalty for failing to file Form 8938 is USD 10,000, with an additional USD 10,000 for each 30-day period of non-compliance after a 90-day IRS notice, up to a maximum of USD 50,000.

Form 1040 and Schedule 1

The winnings are reported on Line 8z of Schedule 1 (Additional Income and Adjustments to Income) attached to Form 1040. The taxpayer should describe the income as “Foreign lottery winnings – Hong Kong Mark Six” and enter the amount in US dollars. The exchange rate to be used is the yearly average exchange rate published by the IRS (or the spot rate on the date of receipt, if more advantageous, provided the taxpayer is consistent). For the 2025 tax year, the IRS will publish the relevant rate in the Internal Revenue Bulletin in early 2026. The taxpayer must also file Schedule B (Interest and Ordinary Dividends) if the winnings are held in an interest-bearing account, as the interest earned on the prize is also taxable.

The Statute of Limitations and the Streamlined Filing Compliance Procedures

The general statute of limitations for assessing additional tax is three years from the date the return is filed, or two years from the date the tax is paid, whichever is later (IRC § 6501). However, if the taxpayer fails to report more than 25% of gross income, the statute extends to six years. For a taxpayer who wins a significant Mark Six prize and fails to file, the IRS can assess tax at any time. The IRS’s Streamlined Filing Compliance Procedures, available to non-willful taxpayers who have failed to report foreign income, require the filing of three years of amended or delinquent returns and six years of FBARs. However, this program is not available if the IRS has already initiated an examination. Given the US-Hong Kong TIEA, the IRS has the legal mechanism to request information from the Hong Kong Jockey Club or Hong Kong banks, making voluntary disclosure the prudent path for any non-compliant taxpayer.

Actionable Takeaways

1. Report the full amount of any Mark Six winnings as “other income” on your US tax return (Form 1040, Schedule 1, Line 8z), as the IRS considers all foreign gambling winnings to be gross income under IRC § 61.
2. File an FBAR (FinCEN Form 114) if the prize money is deposited into a Hong Kong bank account and the aggregate value of your foreign accounts exceeds USD 10,000 at any point during the year; the penalty for a willful failure to file can reach 50% of the account balance.
3. Consider the timing of the prize receipt: if you are planning to renounce your US citizenship, note that the exit tax under IRC § 877A applies to covered expatriates with a net worth exceeding USD 2 million, and a large lottery win could push you over that threshold.
4. Do not assume that the Foreign Earned Income Exclusion (IRC § 911) applies; it is strictly limited to earned income and cannot reduce or eliminate tax on lottery winnings.
5. If you have not reported past winnings, consult a US tax attorney immediately to assess eligibility for the IRS Streamlined Filing Compliance Procedures before the IRS initiates an examination under the US-Hong Kong TIEA.

Disclaimer: 本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。 This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.