The Tax Consequences Of Helping United Fix Bugs On Their Site

19

Last month the news that United handed out millions of miles as part of their bug bounty program went viral.  CNN Money, Fox, Business Insider, the BBC, and many more outlets covered the story of domestic white hat hackers that won at least 1,000,000 miles each for reporting remote code execution bugs on United.com.

Surprisingly none of the news outlets covered the tax implications of being awarded 1,000,000 miles.

Many companies offer cash bounties, but the tax implications of that aren’t as critical. After all, you can just take part of the cash winnings to pay the tax bill. Not so with miles that officially can’t be sold.

The IRS considers miles earned from flights and from credit cards to be purchase rebates which are non-taxable. However I’ve received 1099s for miles earned from opening checking accounts in the past, so miles earned from other sources are definitely taxable.

I reached out to United asking about the tax implications and they responded that they will be sending out 1099s at a value of 2 cents per mile for domestic participants.

So the 1,000,000 mile prize comes with a tax bill equivalent to $20,000 of income. The marginal tax rate for a NYC based household that has $91,000 of total income is 28% federal+3.65% local+6.45% state=38.1%. For that household, winning the miles will result in an out of pocket cost of $7,620. That cost could rise further if the additional “income” also knocks out any other tax deductions due to the higher overall income level.

To be sure, that’s still a decent price for obtaining miles (0.76 cents per mile), but it sure puts a damper on the program. Perhaps not quite as bad as how I imagine the contestants on Wheel of Fortune feel after they realize the real cost of their “free” trip to Jamaica when they get hit with a 1099 for $11,500. But a damper nonetheless.

—————————————————————————————

No, you won’t get a tax bill for telling United to fix a crucial award searching bug, but you will have my thanks. Read this post for how to provide feedback to United about their new site and click on the retweet and favorite buttons in the tweet below to make the issue heard by United:

Leave a Reply

19 Comments on "The Tax Consequences Of Helping United Fix Bugs On Their Site"

Notify of
Sort by:   newest | oldest
Makir Tov

Been there (reported to united as per your post yesterday) and done that.

GTR

I think the better question is why is anyone paying net effective %38 of every dollar earned to government entities…

fakewooder

From here, it seems that non-transferable miles are not taxable until they are redeemed. So it’s not really worse than a cash payment. Don’t have the cash for the tax bill? Just leave the miles in a drawer until you’re ready to pay for them.

http://www.irs.gov/uac/Gift-Bag-Questions-and-Answers

David

It’s funny that they report the miles value at 2 cents, and then they do everything they can to prevent you from getting anywhere near that value.

fakewooder

I would think that you could also claim that you don’t necessarily agree with United’s valuation of the miles.

benny

@GTR: that’s not how a marginal tax system works

@fakewooder: you can dispute the value on the 1099

Yaakov

@fakewooder: It’s not so clear

gav

@Dan
I love when you do these calculations.

ConcernNovice

So if this true then how about the Bankdirect AAAdvantage mile checking account? You an earn money to possibly 60000 miles a year if you have 50 grand to spare. Would those 60000 miles be taxable? Would this trigger a 1099?

Dan

@GTR:
Who said effective?
We’re talking marginal rates here.

@fakewooder:
You don’t get 1099d for a gift bag.

@David:
It’s not hard to get that value if you know what you’re doing, but the average person doesn’t get that value.

But it’s in United’s interests to mark up the 1099 so that they get a bigger deduction.

@fakewooder:
Have fun fighting the IRS.

@ConcernNovice:
Bank Direct doesn’t 1099 for miles.
Other banks, like Citibank, do.

Moe

@Dan: I know this doesn’t belong but do you have trip notes on Orlando. Going there next week and was looking for trip notes from you on it but couldn’t find..

1099

Which banks issue for bm?

Josh

Bonuses from checking accounts are considered as interest income and therefore taxable and reported on a 1099-INT or 1099-MISC. Bonuses from credit cards are considered purchase rebates and therefore not taxable.

GTR

Yep. I’m acutely aware of how the tax code work. Just making political commentary in DDMS comments.

Joe

FICA too? The 1099 in this case is likely a 1099MISC marked as contractor compensation – different from a checking account issuing a 1099INT for miles

ExGingi

@Dan@Dan:
IRS isn’t so scary. Just like all creditors, they thrive on intimidation. If you’re not scared you can often prevail with a reasonable argument.

@fakewooder:
There might be a distinction to be made between non-transferable certificates and miles. After all, you can redeem miles on UA for any individual.

@Joe:
Why in the world would you assume that the 1099 in this case is a 1099MISC? These people did not do any contract work for United. They were given a reward for what they did, but were not under any contract. The reason this is not treated as a non-taxable to the recipient gift, is that this was in appreciation and acknowledgement of an effort or contribution to United’s benefit. It was not a pure gift which is out of affection.

tivoboy

As 1099 revenue, one might be able to deduct the time dedicated to the task of finding the bug at a reasonable labor rate to reduce the actual “net income” element of the “award”

sfuzzy

What about the fidelity 50k miles for opening a brokerage account?

Kashif

Am I still liable for taxes from united bug bounty If I am not a us citizen ?

wpDiscuz