Tax touches so many parts of our lives—even in the movies. On May the 4th, it seems fitting to focus on tax themes and consequences in the original “Star Wars.” Well, it’s the original to me—you might know it as “Star Wars: Episode IV – A New Hope” (1977).
(A quick note: My review is based on U.S. law as it might apply to the Rebels. Additionally, although I’m sure that Congress would love to tax droids and space aliens, they haven’t found a way to do it just yet. For tax purposes, I treat the droids as computers (good) and all other characters as if they are human. And, if you’re one of the few people on this planet who haven’t seen the film, the review and analysis contain several spoilers.)
The Background
In the opening crawl, we learn, “It is a period of civil war. Rebel spaceships, striking from a hidden base, have won their first victory against the evil Galactic Empire.” The Empire controls the galaxy—and that includes the economy. It’s likely that, as part of that control, various entities are required to pay taxes and submit to regulatory compliance, a theme raised in films produced later in the series.
(For context, in the fourth film in the Star Wars series and the first film of the prequel trilogy, we learn—also via the opening crawl—that “Turmoil has engulfed the Galactic Republic. The taxation of trade routes to the outlying star system is in dispute. Hoping to resolve the matter with a blockade of deadly battleships, the greedy Trade Federation has stopped all shipping to the small planet of Naboo…” The Galactic Republic preceded the Galactic Empire.)
“A New Hope” begins with the news that the Rebels have stolen the plans for the Death Star, officially called the DS-1 Orbital Battle Station. It could destroy a planet with one shot of its super laser. The Empire wants the plans back because they include a hidden weakness, making the weapon vulnerable.
(Fun fact: Years ago, The White House posted a response on its website to a petition asking that the federal government “[s]ecure resources and funding, and begin construction of a Death Star by 2016.” The answer was a polite—but thought out—no.)
The Empire, led by Darth Vader (voiced by James Earl Jones) and Grand Moff Tarkin, under the Emperor, has two main goals: recover the plans and crush the rebellion.
The Dupe
Early in the movie, Princess Leia (played by the amazing Carrie Fisher) is aboard a small Rebel ship attacked by an Imperial Star Destroyer. To protect the stolen plans, Leia hides them with a message asking for help inside R2-D2, a droid. She sends R2-D2 and C-3PO (also a droid) to the desert planet Tatooine. Afterward, Darth Vader captures Leia.
It’s unclear in A New Hope whether Leia originally stole the plans. But under federal tax law, taxpayers must report “all income from whatever source derived” unless specifically excepted (you’ll find that rule at 26 U.S. Code §61). That includes all illegal activities like safecracking and burglary, as well as illegal gambling and bribes. In fact, the IRS has a program, the Illegal Source Financial Crimes Program, as part of its Criminal Investigations department, which enforces tax rules on income obtained through illegal operations, which would otherwise be part of the “untaxed underground economy.” Skipping out on reporting income—even illegally gained income—can land you in tax trouble.
On Tatooine, R2-D2 and C-3PO are captured by Jawas, humanoids who collect, refurbish, and sell scraps—including droids. A young Luke Skywalker (portrayed by Mark Hamill) accompanies his Uncle Owen to the Jawas’ “shop” in search of a droid who can translate the binary language used by their moisture vaporators. C-3PO fits the bill, and Owen buys him, together with R5-D4.
The tax implications for the Jawas can be complicated. Typically, when you sell something at retail, your profit is the selling price less your basis—basis is the cost you pay for assets plus adjustments. The Jawas appear to scavenge—not steal—meaning they don’t pay to acquire the asset in the first place. The basis, then, is zero. To the extent that they make repairs, the associated costs would add to the basis.
The Jawas don’t typically accept cash for their goods—they trade. A trade is the same, for tax purposes, as a sale. Think of them just like cash: if it were taxable if paid in cash, it’s taxable if paid in goods or services. Here, the transaction is part of a trade or business—that means that the Jawas would report the value received on a corporate return or Schedule C. (If it were taxable but not as part of a business, report it as “other income” on line 21 of Form 1040.) Either way, the Jawas would want to keep excellent records to support income and expenses.
When R5-D4 fizzles, Luke persuades his uncle to take R2-D2 instead, which is fortuitous. While cleaning R2-D2 up, Luke finds the message from Leia inside R2-D2, pleading for help from someone named Obi-Wan Kenobi (played by Sir Alec Guinness).
R2-D2 leaves to find Obi-Wan, and Luke chases after him. Eventually, Luke is captured but rescued by a man who reveals that he is Obi-Wan Kenobi, a former Jedi Knight. Obi-Wan tells Luke about the Force and gives him his father’s lightsaber, telling Luke that his father was also a Jedi killed by Darth Vader.
When you make a gift, the tax due, if any, is payable by the person who makes the gift. In this case, Obi-Wan is the gift-giver.
Each year, you can make gifts up to the federal gift tax exclusion amount to as many people as you like without any gift tax consequences. For 2025, the exclusion amount is $19,000. That means that any person can gift you $19,000 without gift tax consequences—or they could gift 10 people $19,000 without gift tax consequences.
Here’s where it gets tricky. If a gift exceeds the annual limit, most taxpayers don’t automatically pay gift tax. Instead, the amount of the gift over the limit “chips away” at your available federal estate tax exemption—for 2025, that’s $13,990,000 per person.
How much a lightsaber would be worth is not easy to determine. A little research on the internet suggests that a lightsaber could be sold for 20,000–500,000 Republic Credits. Some math gymnastics indicated that a rough exchange rate would work out to $4 to the credit (based on dialogue in A New Hope, a low-end starship was equivalent to 10,000 credits). If that’s true, the cost would range from $80,000 to $2,000,000—well above the federal gift tax exemption but far below the federal estate tax exemption. Instead of paying gift tax on the lightsaber, Obi-Wan would have filed a gift tax return (Form 709) notifying the IRS that his exemption was reduced by the fair market value of the gift.
(The gift tax exclusion amount changes each year—I don’t know what it would have been when Star Wars took place other than “a long time ago in a galaxy far, far away.” But when “A New Hope” was released in 1977, the exclusion amount was just $3,000.)
The Plan
After finding out that Imperial stormtroopers—elite soldiers of the Galactic Empire—have killed his aunt and uncle, Luke travels to the planet Alderaan to turn over the Death Star plans to the rebels. To get there, they need a pilot. They find one in the way of Han Solo (played by the still swoony Harrison Ford) and Wookiee co-pilot, Chewbacca, and their ship, the Millennium Falcon. Solo is reluctant to take the gig, but he owes money to Jabba the Hutt.
Solo, described as a mercenary, asked for 10,000 (presumably in Republic Credits) for the trip. They ultimately agreed to 2,000 upfront and 15,000 at the end of the journey. Assuming that the trip began and ended in the same year, Solo would report all 17,000—but if the payments were in separate years, he would report the payments in the year each was received.
And yes, Solo is described as all kinds of things—including a smuggler. That wouldn’t exempt him from tax. As noted above, income from illegal activities is still taxable.
The Wrench
It turns out that Alderaan has been destroyed. Grand Moff Tarkin tried to extort information from Leia—she lied to him to save the planet, but it didn’t matter. Tarkin blew it up anyway.
Before they can turn back, the gang is pulled into the Death Star. Luke and Solo disguise themselves as stormtroopers to rescue Leia.
The trio escapes and heads back to the Falcon. However, all is not easy. Obi-Wan confronts Darth Vader—they fight a lightsaber duel, and Obi-Wan allows himself to be hit, sacrificing himself to aid the escape.
Leia, Luke, Solo, Chewie, R2-D2, and C-3PO flee the Death Star—plans in hand—but are tracked to the Rebel base. There, engineers find that the Death Star has a specific flaw: a port that, if hit directly, will trigger a chain reaction to destroy the station.
The Fight
Luke joins the Rebel pilots in an attempt to take down the Death Star, but Solo and Chewie initially do not, claiming they have a debt to repay to Jabba the Hutt.
At first, the Rebels are met with significant gunfire, resulting in several fatalities. Solo has a change of heart and returns, along with Chewie, just in time to save Luke. Luke then tries a run, deactivating his targeting system, after the spirit of Obi-Wan instructs him to rely on the Force. Luke then successfully destroys the Death Star, killing Tarkin. Vader escapes into space, setting up the (first) sequel.
The Reward
As a reward for their bravery, Luke and Solo are awarded medals presented by Leia. We’re not sure what kind of award they each receive, although they are described as “gold.” The medals would be taxable to the extent that they are worth something. That’s as true for Rebel medals as Olympic medals and other similar awards (though some exceptions apply to Olympic and Paralympic athletes).
For federal income tax purposes, the value of the medal is determined at the time that it’s earned. Any appreciation in the value of medals would be subject to tax if and when sold. Any money or related compensation would also be taxable.
To the extent that taxpayers are paid for services provided in another country (or galaxy), they may benefit from tax treaty treatment. That happens when another country agrees with the U.S. about the tax treatment of certain kinds of income. Typically, the treaty specifically provides that income earned in one country should only be taxed once.
Taxpayers may qualify for other tax benefits if no tax treaty treatment applies—and so far, we have no extra-planet or extra-solar treaties. For example, Americans who live abroad may claim the foreign earned income exclusion–an exclusion of your foreign earnings up to an amount that is adjusted annually for inflation—and the foreign tax credit—a credit for foreign taxes imposed on you by a foreign country or U.S. possession so that you aren’t taxed twice on the same income.
The Skinny
It’s challenging to think of every tax consequence throughout the movie, especially those in a fictional world, but these are the highlights.
If you have a movie for me to review—especially those with an interesting tax or financial crimes twist—send me an email (kerb@forbes.com) for consideration.
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