Why a normal auction isn’t gambling
Gambling means paying for a chance at a prize, with luck deciding who wins. A normal auction doesn’t fit, because you never risk money on a result you can’t control. If you’re outbid, you walk away having paid nothing. If you win, you pay what you offered and get the item you bid on, so it works like any other purchase.
That holds for charity silent auctions too. The California attorney general says a silent auction “is not a game of chance”, because the item is sold to the highest bidder. That’s why a charity there doesn’t need to register a silent auction with the state, as it would a raffle.
Silent auctions vs raffles
A raffle is the opposite case. Everyone pays for a ticket, most people get nothing, and a random draw picks the winner, so it’s a lottery (see is a raffle gambling). The IRS draws the same line. Its guide for charities lists raffles as gaming next to bingo and casino nights, but auctions aren’t on the list.
The tax rules follow from that. A raffle ticket isn’t a tax-deductible donation, because you’re paying for a chance to win. At a charity auction, you can only deduct what you paid above the item’s value. The IRS’s own example is a $600 week at a beach house that’s worth $600 to rent, which counts as a purchase with nothing to deduct.
Penny auctions are a different story
Penny auctions charge you for every bid, which is what pushes them toward gambling. The FTC warned in 2011 that on these sites “you have to pay each time you place a bid, whether you win or lose”. Its example was a camera won for $50 after 200 bids at $1 each, which really cost $250 plus shipping.
BidCactus worked this way. Each bid cost 75 cents and raised the price by one cent, and near the end of an auction every new bid added a few seconds back to the clock. A customer sued in Connecticut, arguing the site was an illegal lottery, and said he had lost $9,187.56 even though he won 26 auctions. In 2012 the court refused to dismiss the case. It found that a bidder’s chances depended on things he couldn’t control, such as how many other people were bidding and how many bids they had left. The judge didn’t make a final ruling on whether the site was gambling.
Research shows how much the sites took. The economist Ned Augenblick studied 166,000 auctions on Swoopo, a large penny auction site, and found its average profit margins were over 50%. His explanation is the sunk-cost fallacy, where people keep bidding because of what they’ve already spent. Late in an auction, a 75-cent bid returned only 18 to 24 cents on average, yet bidders kept placing them.
What it means for you
Bidding on eBay, at an auction house or at a school fundraiser isn’t gambling, so the only real risk is paying more than you meant to. If a site charges you to bid, add up what your bids cost before you start, because every bid you place on an item you don’t win is money you’ve lost.
Questions people also ask
Is a silent auction considered gambling?
No. The California attorney general says a silent auction isn't a game of chance, because the item is sold to the highest bidder. That's why a charity doesn't have to register it the way it would a raffle.
Is bidding on eBay gambling?
No. You only pay if you win, and you pay for the item you bid on. Losing an auction costs you nothing.
Are penny auctions gambling?
They can be. In 2012 a federal court in Connecticut refused to throw out a case arguing that the penny auction site BidCactus was an illegal lottery, because bidders paid for every bid and whether they won depended on things outside their control.
Can I deduct what I paid at a charity auction?
Only the part you paid above what the item is worth. If you pay $600 for a week at a beach house and that's the fair rental value, the IRS says you haven't made a deductible donation.
Sources
- California Attorney General, nonprofit raffles (silent auctions)
- IRS Publication 3079, Tax-Exempt Organizations and Gaming (Rev. 10-2018)
- IRS Publication 526, Charitable Contributions
- FTC, FTC cautions consumers on the pitfalls of penny auctions (2011)
- Mendelsohn v. BidCactus, LLC, No. 3:11-cv-1500 (D. Conn. 2012), ruling on motion to dismiss
- Augenblick (2016), The Sunk-Cost Fallacy in Penny Auctions, Review of Economic Studies