Nadia Murad and Lamia Haji Bashar have become figureheads for the effort to protect the Yazidis, followers of an ancient religion with more than half a million believers concentrated in northern Iraq.
"They have a painful and tragic story" but "they felt compelled to survive to bear witness," European Parliament chief Martin Schulz told the assembly in Strasbourg.
"The courage of these two women, the dignity they represent defies all description."
Given each year by the European Parliament, the award is named after the dissident Soviet scientist Andrei Sakharov, who died in 1989, and honours individuals who combat intolerance, fanaticism and oppression, often falling foul of their governments as a result.
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Murad, a slight, softly spoken young woman, was taken by IS from her home village of Kocho near Iraq's northern town of Sinjar in August 2014 and brought to the city of Mosul.
As a captive of the reviled extremist group, Murad, who today is 23, said she was tortured and raped.
After 20 months in captivity she escaped but then fell into the hands of an Iraqi hospital director who also abused and raped her and several other victims.
In a final tragedy, Bashar suffered horrific burns to her face and lost her right eye when one of her friends stepped on a landmine following their flight from the hospital director.
The 2014 massacre perpetrated against the Yazidis by IS fighters in Sinjar forced tens of thousands to flee and left an already vulnerable community under perilous threat.
In speeches and interviews, Murad has voiced deep frustration with the international community for abandoning her people in the hands of grotesquely violent criminals.
Last year, the European Parliament awarded the prize to Saudi Arabian blogger Raif Badawi, jailed for "insulting" Islam.
Past winners include Pakistani education campaigner Malala Yousafzai, late South African rights icon Nelson Mandela and Myanmar activist Aung San Suu Kyi. Exiled Turkish journalist Can Dundar and Crimean Tatar activist Mustafa Dzhemilev were also shortlisted for prestigious award.
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