The 45-year-old writer was chosen for the Hellman/Hammett award given every year to writers who suffer reprisals for expressing views that a government opposes.
Rahmani's writings on religious modernism and the political history of Iran have criticised the relationship between religion and politics in Iran and its adverse effects on democratic development, Human Rights Watch said.
"Taqi Rahmani has spent more than a third of his life behind bars just for expressing his opinions," said Joe Stork, Washington director of Human Right Watch's Middle East Division.
"His experience is a harsh testimony to the plight of writers, dissidents and other peaceful critics in Iran today."
Rahmani has been in and out of prison for a total of 17 years, starting in 1981, when he was sent to jail for three years for writing for the underground publication Pishtaz.
History of detention
In 1986, he was jailed for 11 years for writings on religious modernism and politics, the group said.
After being released in 1997, Rahmani resumed writing for reformist newspapers and was arrested again in 2001 and jailed for 14 months.
In 2003, Rahmani and two of his colleagues, Hoda Saber and Reza Alijani, were arrested on the orders of Tehran's chief prosecutor, Saeed Mortazavi, Human Rights Watch said.
The three dissidents have been held without being charged for the past 22 months.
Since the Hellman/Hammett programme began in 1990, more than 400 writers from 88 countries have received grants.
Human Rights Watch has repeatedly called on the Iranian government to release Rahmani immediately and unconditionally.