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

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.