Tax Law

Yes, The IRS Demands That You Pay Taxes On Your 'Squid Game' Prize Money

A $39 million prize will result in a hefty tax bill and the government will be as eager as a loan shark to collect it.

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The Netflix hit “Squid Game” is about 456 crazy poor Asians in massive debt who enter a secret contest where the winner will win approximately $39 million as of the date of this publication. But those who are eliminated are killed.

While I have done my best to minimize spoilers, it’s obvious that someone wins the prize money. A $39 million prize will result in a hefty tax bill and the government will be as eager as a loan shark to collect it. Since the contestants are brought into the game without notice, it does not give them the opportunity to do some tax planning beforehand.

So today, I’ll answer some common questions I received about the “Squid Game” contest regarding the possible tax consequences for the winner if he or she is a U.S. citizen or permanent resident. Because the contest is conducted in secret, it raises some unique issues when it comes to reporting the income and the risks of not reporting for tax purposes.

Is the prize money taxable under these circumstances? United States citizens are taxed on income earned anywhere, even if it was earned on a secret, remote island. If the island is recognized as a part of South Korea, then any Korean income taxes paid (not the amount projected to be owed) will be credited against the U.S. tax to avoid double income taxation.

Can the IRS find out about the winnings if I don’t report it? Let’s assume the contest organizers won’t issue a 1099 to the IRS. Still, the IRS can find about the prize money if it is transferred to your bank account. U.S. banks are required to file a Currency Transaction Report (CTR) whenever there is a transaction exceeding $10,000 on behalf of a person. While the filing of one or even a few CTRs for relatively small amounts might not arouse suspicion, a single deposit of $39,000,000 could. Especially if the funds came from an overseas account or from a suspicious bank. However, it is possible that the IRS may not take any action because of a lack of resources or they just decided not to.

What if I keep a low profile for a year and not spend any of the money or at least engage in transactions that does not meet the requirements for filing CTRs? Could that minimize the chances of an IRS investigation? I am not sure whether keeping a low profile could reduce the chances of an investigation. But it could be an indication that you are trying to hide the money and that could result in a criminal investigation and tax evasion charges.

Let’s look at this from a more practical angle. If you want to avoid transactions that result in CTR filings, that severely limits what you can do with the money. It will be impossible to buy a house or a new car in cash. While you can make monthly mortgage payments under $10,000 per month, getting a jumbo mortgage for a seven-figure house will be almost impossible without a down payment. At best, you will be able to buy through financing a fairly nice car but a mediocre house. Also, if you get these loans, you will end up paying unnecessary interest payments.

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With that being said, if you want to keep a low profile, live a quiet life and spend modestly, you will probably end up with a large amount of money in the final years of your life. If that is the case, then wouldn’t it be better just to pay the taxes owed so you can live without the threat of tax evasion charges or a possible IRS bank levy hitting you for back taxes, penalties, and interest? You will end up in the same position financially but with a clear conscience.

All of the “Squid Game” contestants have to pay back debts. Can those payments be deductible from taxable income? Generally, no. Since receipt of loan proceeds are not taxable income, repaying loan principal is not deductible. But let’s suppose most of the debt is interest payments, which is quite possible when loan sharks are involved. In some cases, they could be deductible, such as interest paid on home mortgage loans and business loans.

What if I shared some of my winnings with the families of the eliminated contestants because I felt bad for them? Could that at least divert some of the tax liability to them? In this case most likely not. The payment to a family member would be a gift because the money was given to them out of affection, generosity, and charity. Gift payments are not deductible from income. In fact, a gift could make the situation worse. Because not only will the full amount of the winnings be subject to income tax but the transfer could be subject to a gift tax provided that the gift exceeds the $15,000 annual exclusion and the $11.7 million lifetime exclusion.

Also, assuming the transfer is not a gift, the tax liability cannot be transferred just because you gave the money to someone else. The “assignment of income doctrine” states that the taxpayer who earns the income has to pay the taxes and cannot assign the tax bill to another.

Considering the violent nature of the “Squid Game” contest, the winner will have a lot to think about. And the thought of being chased by the IRS should not be one of them. If there is a season two in the future, the organizers should try to recruit a tax professional as a contestant.

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Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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