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What is the Tax Burden on 100,000 Turbine Points? December 2, 2010

Posted by Wilhelm Arcturus in Dungeons & Dragons Online, entertainment, Humor, Lord of the Rings Online.
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I have no idea, really, but it is probably more than you think.

The latest LOTRO contest brought this thought to my mind.

The team at Turbine is having a contest, the grand prize for which is 100,000 Turbine Points.

That is a lot of Turbine points.

Enough that we’re starting to talk about real world value that is getting into consequential (i.e. taxable) amounts of money.

Depending on how you purchase them (since I have not seen Turbine publish anything like SOE’s guideline which pegs the value of 100 Station Cash at $1.00 US), that many Turbine points could run you anywhere from $600 to $1500.

For the sake of easy math, let’s call it 100 Turbine Points = $1.00 US, just like SOE’s model, in which case Turbine is giving you a prize worth $1,000.

And since the US Internal Revenue Service requires a business to file and issue a 1099-MISC tax document if they give you more than $600 in a calendar year, if you win you might find yourself paying for some of those free Turbine Points.

1099-MISC Filled Out Incorrectly

Think I am kidding?  Ask anybody who has ever been on Oprah’s Favorite Things episode.  You get all that free stuff, then you get a 1099-MISC with the retail value listed on it and the IRS wants its cut of that income.  Or something along those lines.  From the instructions for the 1099-MISC form:

Box 3. Generally, report this amount on the “Other income” line of Form 1040 and identify the payment. The amount shown may be payments received as the beneficiary of a deceased employee, prizes, awards, taxable damages, Indian gaming profits, or other taxable income. See Pub. 525. If it is trade or business income, report this amount on Schedule C, C-EZ, or F (Form 1040).

The tax on ordinary income is 28% the last time I checked (less all those deductions, which includes the fee for the tax person to get you all those deductions) so you could, theoretically find the IRS looking for up to 28,000 of your Turbine Points, if you are in the worst possible tax situation.  And then there is your state income tax, if you live in the right/wrong state.  That could add up to another 10,000 Turbine Points.

Well, the cash equivalent thereof.

I don’t think the IRS wants the points any more than it wants the engine out of the new VW Beetle some people got on Oprah last week.  But I like the idea of the IRS and the Franchise Tax Board with a fund of Turbine Points.  What would they buy?  Probably more storage space to hold the stuff they impound.

I know that, in the past, people have talked about the real world value of virtual currency.  Edward Castronova has measured the… gross virtual product I suppose… of such currencies in virtual enconomies while Julian Dibbell, in his book Play Money tried to get the IRS to put a value on his virtual world earnings.

But that has generally been about virtual currencies which are controlled by companies that deny, quite vehemently, that they are convertible into real world money and actively seek to stop such conversions.  (How many gold sellers has Blizzard banned to date?)

But now Turbine is giving away 100,000 units of a virtual currency which quite clearly has real world value.  They sell it for real world currency.  Even if we ignore the virtual currency dimension, it is something of value, a prime revenue stream for Turbine, that users buy to gain access to various aspects of the game.

Given that, is the IRS going to want a cut of the prize?

I don’t know, but I’m still entering the contest.  I do know what I’ll do with the points I am allowed to keep after taxes.

Comments»

1. cyanbane - December 2, 2010

Mister Wilson could be the fiercest raid mob of all.

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2. Noizy - December 2, 2010

So can the winner of the Turbine points deduct any contributions he made to Eve’s PLEX for Pakistan campaign a couple of months ago?

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3. Stabs - December 2, 2010

From a tax point of view there’s a problem with treating virtual currency as real. If they do then is it not reasonable to pay your tax in virtual money?

In other words if they want 28% of 100K Turbine Points, well here’s 28K Turbine points – buy the office a mount!

If it’s money enough to pay tax on it’s money enough to pay tax with.

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4. Bhagpuss - December 2, 2010

I’m no accountant but I believe that in the U.K. “prizes” would come under Capital Gains Tax, not Income Tax. You don’t start paying CGT until your gains in a tax year exceed £10k and lottery and gambling wins are not taxable.

The time when virtual assets become taxable must be coming closer all the time. As people who have grown up with the concept grow up and become tax officials, politicans, lawyers and financial experts, the veil will be lifted and legislation and regulation will be revealed.

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5. SynCaine - December 2, 2010

“lottery and gambling wins are not taxable.”

What? That’s crazy if true. You get hit with a 40% (I believe) tax when you win more than 10k in the US.

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6. mike - December 3, 2010

I do not think they can/will tax it. As far as i know the points are not worth anything they are virtual and do not exist in the real world and cannot be sold or traded unlike a VW bug or other items. If it was a trip or something physical. I think this is why virtual items are not taxed just think of the people in eve that lose thousands of dollars in isk claiming a loss on there taxes to the tune of 10k +.

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7. mike - December 3, 2010

In the USA any income from gambling is taxable and losses are deductible. I think but not sure the limit is 1000$ anything over you will get a statement at the end of the year for it. Even if you dont get a statement you should report it when you file even tho most people dont because they can get by with not reporting as long as no one turns you in theres no way for them to know you got the money.Yes its 40% tax on winnings over 10k and its no real way to lessen the tax because its not earned income so you do not get child tax credits or any of the other standard deductions on the money. Although im no tax professional so i could be wrong I dont even think congress knows how to do taxes its so complicated.

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