Smith was awarded £10,000 prize money for her work, which was placed on a shortlist of six books in October.
How to be Both was published in two versions, each switching the order of narratives. One part follows the life of an Italian fresco painter in the 1460s while the other tells of a teenage girl grieving for her mother in the present day.
Speaking before the award ceremony, Smith said: “This prize is really about the thing closest to your heart if you work with the novel as a form… The point of this is that it’s about the language, about all the things a novel can do.”
“That’s what this prize is about. It’s about the ‘multi-variousness’, the everything the novel can do is included in this prize.”
Goldsmiths College, University of London and the New Statesman established the award in 2013. It honours works that are “deemed genuinely novel and which embody the spirit of invention that characterises the genre at its best.”
Chair of judges and senior lecturer at Goldsmiths, Francis Spufford, said: “We are proud to give this year’s Goldsmiths Prize to a book which confirms that formal invocation is completely compatible with pleasure – that it can be… a renewal of the writer’s compact with the reader to delight and to astonish.”
Fellow judge and culture editor of New Statesman, Tom Gatti, added: “Ali Smith’s How to be Both is a playful and profound book.”
Smith did an interview with the New Statesman where she discussed her book, beginning at 11:30 minutes.
How to be Both fought off competition from five other novels to claim the award, including fellow Man Booker prize nominee J by Howard Jacobsen and Paul Kingsnorth’s crowd funded The Wake.
The prize is open to novels written by authors from the UK and the Republic of Ireland and nominations for the 2015 prize will open this summer.