I recently received in the mail a set of prayer flags as part of a mailer, which got me thinking (and researching).
Without a question, using the flags normally would be an act of darchei emorie or using "lucky charms." But are they in fact avodah zarah (requiring destruction)? If it is AZ, then the optimal method of destruction is to burn it, BUT that's consider the appropriate method of disposal of sacred objects according to Buddhism!
Based on what I was able to find, the string of flags themselves do not contain any explicit reference to a god of any kind - they only exhibit prayers for health, happiness, wealth, etc. The imagery on the flags (a horse carrying three flaming gems) is a metaphor for the human soul and, while it is a "sacred" image, is not worshipped in any way. Without any reference to an actual foreign god, is there really a problem of AZ for Buddhist prayer flags?
To provide additional information on the flags:
The center of a prayer flag traditionally features a Lung ta (powerful or strong horse) bearing three flaming jewels (specifically ratna) on its back. The Ta is a symbol of speed and the transformation of bad fortune to good fortune. The three flaming jewels symbolize the Buddha, the Dharma (Buddhist teachings), and the Sangha (Buddhist community): the three cornerstones of Tibetan philosophical tradition. [...]
Traditionally, prayer flags are used to promote peace, compassion, strength, and wisdom. The flags do not carry prayers to gods, which is a common misconception; rather, the Tibetans believe the prayers and mantras will be blown by the wind to spread the good will and compassion into all pervading space. Therefore, prayer flags are thought to bring benefit to all.
The flags do have mantras written on them, but there is significant dispute as to whether these have intrinsic meaning or are simply vocal meditative devices.