To legally raffle a car, a qualifying nonprofit has to clear three separate sets of rules: state gambling law (which usually means getting a raffle license), federal postal law (which restricts mailing anything tied to a lottery), and IRS rules on reporting and withholding when the winner takes the prize. Miss any one of them and the raffle can be reclassified as an illegal lottery, with criminal exposure for organizers and risk to the group’s tax-exempt status.
The legal test behind all of this is simple. Under federal postal law and most state gambling statutes, an illegal lottery has three elements: a prize, an outcome decided by chance, and consideration (something of value the entrant pays).1U.S. Postal Inspection Service. A Consumers Guide to Sweepstakes and Lotteries A car raffle has a prize and uses chance, so legality turns on how the consideration piece is handled. States take one of two approaches: some carve out an exemption letting qualifying nonprofits sell raffle tickets outright, while others require the organization to strip out consideration by offering a genuine free way to enter.
Who Is Allowed to Run a Car Raffle
Every state limits raffles to organizations that exist for a charitable or community purpose rather than private profit. Eligible groups typically include registered nonprofits, religious organizations, veterans’ groups, fraternal lodges, and volunteer fire departments. Individuals and for-profit businesses are almost universally prohibited.
Being the right type of organization isn’t enough on its own. Most states also require that the group has been continuously active in the state for a minimum period before it can apply. That minimum ranges from one year in some states to three or five in others. Many states impose a minimum membership number as well. A 501(c)(3) designation under the Internal Revenue Code satisfies the tax-exempt requirement in most jurisdictions, and other 501(c) categories such as veterans’ organizations under 501(c)(19) often qualify too.
Getting a Raffle License and Printing Tickets Correctly
Most states require a raffle license or permit before a single ticket is sold. The application typically asks for tax-exempt documentation, the names of responsible officers, a description of the prize, the number of tickets to be sold, the ticket price, and the date and location of the drawing. Fees for charitable raffles tend to be modest, from nothing up to around $30.
Tickets have to meet formatting rules. In most states, each ticket must be individually numbered and must display the organization’s name, the ticket price, and the drawing’s date, time, and location. Some states cap the price of a single ticket, the total number of tickets that can be sold, or the total prize value awarded in a year.
For high-value prizes like a car, some jurisdictions also require a fidelity or surety bond, usually set at the aggregate retail value of all prizes. The bond protects ticket buyers if the organization fails to award the prize as promised.
Recordkeeping is strict everywhere. Track every ticket sold, all revenue collected, every expense, and how the proceeds are distributed. Those records are subject to audit by the state agency that issued the license. Retention rules vary, but keeping records for at least three years is a safe baseline.
Why a Free Entry Option Protects the Raffle
Even where the state permits nonprofits to sell raffle tickets, offering a free method of entry is the single most protective step an organizer can take. A genuine free alternative removes the consideration element, so the drawing no longer meets the legal definition of a lottery. That matters for two reasons: it keeps the raffle legal in states that require it, and it opens up the ability to promote through the mail without violating federal law.
In practice, the free entry is usually a checkbox on the raffle form or a separate entry card. The U.S. Postal Service has described acceptable language along the lines of “Please enter my name in the drawing. I do not wish to make a donation at this time.”2United States Postal Service. Customer Support Ruling PS-307 – Lotteries – Raffles The free option has to be real and equally available. Burying it in fine print, or making it practically impossible to use, defeats the purpose.
The Federal Mail Restriction
This is where organizations get caught most often. Federal law makes it a crime to mail any ticket, advertisement, or circular related to a lottery, with penalties of up to two years in prison for a first offense and up to five years for later violations.3Office of the Law Revision Counsel. 18 USC 1302 – Mailing Lottery Tickets or Related Matter The Postal Service treats any raffle with prize, chance, and consideration as a lottery, which makes its tickets and promotional materials nonmailable.2United States Postal Service. Customer Support Ruling PS-307 – Lotteries – Raffles
The workaround is the same free entry option described above. If someone can enter without paying, the Postal Service no longer classifies the promotion as a lottery, and the materials become mailable. An organization that sells only in person and does no mail promotion can technically skip this step in states that don’t require it, but very few car raffles operate that narrowly.
Selling Tickets Online
No federal law broadly prohibits internet-based raffle sales, but state law creates real problems. Several states explicitly ban online raffle ticket sales; California, for example, prohibits both operating a raffle over the internet and selling raffle tickets through it. Other states require physical, preprinted paper tickets and disallow electronic entries.
Even states without an explicit ban often have rules that make online sales impractical: requirements that tickets be individually numbered on paper, that sales stay inside the state, or that the buyer be physically present. Selling through a website also raises the question of whether the raffle is being conducted in every state where a buyer lives, which can trigger licensing obligations in each of those states.
For most organizations, the safe route is selling tickets in person, at events, and through direct member contact. If your state allows some form of electronic raffle, confirm the specific rules before setting up any online sale.
What the Organization Owes the IRS
Running a car raffle creates several federal tax obligations for the sponsoring group, even when it’s tax-exempt.
Raffle proceeds can trigger unrelated business income tax if the gaming activity is regularly carried on and isn’t substantially related to the exempt purpose. A key exception applies when volunteers perform substantially all the work of running the raffle: in that case the income is not treated as unrelated business income, regardless of how often the raffle is held.4Office of the Law Revision Counsel. 26 USC 513 – Unrelated Trade or Business For most volunteer-run charity car raffles, this exception keeps UBIT off the table. Groups that hire staff or contractors to manage the raffle should get tax advice, because paid labor changes the analysis.
The federal excise tax on wagers doesn’t apply to drawings conducted by organizations tax-exempt under Section 501 or Section 521 of the Internal Revenue Code, as long as no part of the net proceeds benefits a private individual.5eCFR. 26 CFR Part 44 – Taxes on Wagering
Reporting on Form 990 is where a car raffle almost always shows up. Organizations reporting more than $15,000 in gross income from gaming activities must complete Schedule G (Part III).6Internal Revenue Service. Instructions for Schedule G (Form 990) A single car raffle will almost always cross that threshold, so plan on filing Schedule G with revenue, expenses, and net income broken out by gaming activity.
Reporting and Withholding on the Winner’s Prize
Winning a car in a raffle is a taxable event, and the organization has specific reporting and withholding duties that took a meaningful step up in 2026.
Form W-2G
For payments made in calendar year 2026, the organization must file Form W-2G when raffle winnings are $2,000 or more and at least 300 times the amount of the wager.7Internal Revenue Service. Instructions for Forms W-2G and 5754 (01/2026) The prior threshold was $600. For car raffles the change has little practical effect, since any car’s fair market value will clear $2,000. Copies of the W-2G go to both the winner and the IRS.
Federal Withholding
When raffle winnings minus the ticket cost exceed $5,000, the organization must withhold federal income tax.8Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source You can’t withhold cash from a car, so the organization and winner handle it one of two ways.7Internal Revenue Service. Instructions for Forms W-2G and 5754 (01/2026)
- The winner writes the organization a check for 24% of the car’s fair market value minus the ticket price. On a $40,000 car with a $100 ticket, that’s 24% of $39,900, or $9,576.
- The organization pays the withholding itself. Because covering the tax adds to the winner’s income, the effective rate is 31.58% of the net winnings. On the same example, the organization pays $12,600.
Withheld amounts are reported on Form 945, due by January 31 of the following year. Failing to withhold and deposit can result in a trust fund recovery penalty assessed personally against the organization’s officers.
What the Winner Still Owes
The withholding is a prepayment, not the full bill. The car’s fair market value gets added to the winner’s ordinary income for the year and can push them into a higher bracket. Winners should also plan for state income tax where applicable, sales or use tax on the vehicle, title transfer and registration fees, and insurance. A $50,000 car can easily bring $15,000 or more in combined tax and transfer costs. Winners who can’t cover those costs can generally decline the prize before taking possession, and the raffle rules should say what happens if they do.
Handing Over the Car
Before the raffle even starts, the organization needs a clean title on the vehicle with no outstanding liens. On the day of the drawing, the winner will usually need to present a valid driver’s license and proof of automobile insurance before taking possession.
The transfer itself follows the same steps as any vehicle transfer: completing the certificate of title transfer at the DMV, providing the original title, paying applicable transfer fees, and showing proof of insurance along with any state-required emissions or safety inspections. Prepare a bill of sale even though no money changes hands, including the VIN, odometer reading, date of transfer, and fair market value, and note clearly that the vehicle was awarded as a raffle prize rather than sold.
First-time organizers tend to underestimate the logistics. The vehicle has to be acquired well in advance, insured and stored until the drawing, and the winner-notification and transfer process should be written out before any ticket is sold. A written procedure for a winner who can’t be reached, can’t afford the taxes, or turns out to be ineligible keeps a celebration from becoming a legal problem.