Nowadays you have people earning points for just about everything. This ranges from credit card rewards, to points for flights and hotel stays, to earning points through all kinds of other third party transactions, from shopping online to buying flowers.
With rewards as generous as they are, a lot of people are getting thousands of dollars of value per year (if not more) from their rewards points. This raises an important question — are rewards points taxable?
Before I answer this question, let me of course note that I’m not a tax professional, so this is just the take of someone who knows a lot about rewards points, and has a lot of experience collecting and redeeming them. 😉 You’ll want to consult a tax professional for your own situation. Let me also emphasize that this post is based on my understanding of regulations in the United States, so it’ll be a different story in other countries.
In this post:
When rewards points aren’t taxable
As a general rule of thumb, airline miles, hotel points, and credit card points aren’t taxable. This would include points earned through your actual travel (like airline miles and hotel points, regardless of whether you’re paying, or your employer), as well as points earned through credit cards.
Why is this? Because the IRS views these rewards as being rebates on purchases you’re making. That’s because you’re earning them for spending money — either for spending a certain amount on a credit card, or with a hotel or airline.
So if you have a credit card offering 2% cash back, that 2% is viewed as a rebate on your purchase, and therefore isn’t taxable.
When rewards points are taxable
Generally speaking, rewards points would be taxable if they can’t be viewed as a rebate for some sort of purchase, but rather are viewed as an incentive for something. To give a few examples:
- If an airline, hotel, or credit card company has a sweepstakes and you win, that would be viewed as taxable income, because you can’t argue that’s a rebate on any of your purchases
- If you earn points for referring a friend to a credit card, that would be taxable, since the rewards points you’re earning can’t be viewed as a rebate (1099s are ordinarily sent out for these referrals)
- In most circumstances, if you earn points for opening a checking or savings account, that would be taxable (this is because the requirements are typically to maintain a certain minimum balance, or make a certain number of direct deposits)
So that last point is also why earning interest on a checking account would be considered taxable income. You’re not having to spend anything to earn that interest, and therefore it’s taxable.
Now, the concept of taxing rewards points is often pretty controversial in the first place, given that us consumers often don’t even “own” the points in our accounts. Often the program terms make it clear that the rewards are owned by the programs, and can be taken away for any reason. So how can one be taxed on something that doesn’t even belong to them?
Why credit card sign-up bonuses generally aren’t taxable
On the surface, you might think that a generous credit card sign-up bonus would be taxable, like if you can earn 50,000 points after one purchase, or 75,000 points after spending $3,000 within three months.
However, fortunately in practice these are considered to be rebates on spending, and therefore aren’t taxable. That’s because in a vast majority of cases, credit card sign-up bonuses require you to spend a certain amount to earn that bonus.
So as long as a transaction is involved, it generally isn’t taxable. That might defy logic, because some credit cards offer 50,000 points (worth $500+) for making a single purchase. A $500 rebate on a $1 purchase doesn’t make a whole lot of sense, but… 😉
Credit card rewards: cash back vs. points
While we’ve established that credit card rewards generally aren’t taxable because they’re viewed as a rebate, is there a distinction to be made between earning cash back on a card rather than earning points?
The answer is no, generally not. The way credit card companies view it, points have value as well, so for all practical purposes, there’s not a distinction between cash back or points in terms of taxes.
In other words, it doesn’t matter whether you’re earning 2x points or 2% cash back on a credit card, neither will be taxed. Similarly, it doesn’t matter whether you earn 10,000 points or $100 for referring someone to a credit card, both will be taxed.
The taxable value of points
In those cases where you do win a sweepstakes, or do earn points as an incentive rather than a rebate, what is the taxable value of points?
Well, there’s not actually a correct answer. Simply put, the company issuing the points that sends you a 1099 will establish a value for the points, though that can easily be disputed. Unlike cash, there’s not a single “correct” value for most points currencies.
For example, some people will redeem Amex points for 0.5 cents each, while some will redeem them for 1.5+ cents each.
Often times the company sending out the 1099 will claim the value based on a rate at which points can easily be “cashed out,” though even that can potentially be disputed.
This is actually a point of controversy. I’ve several times had lawyers reach out asking me to testify in court as an “expert” on the value of points.
If you do want to dispute the value of points, over a decade ago, View from the Wing wrote a useful post about how to do this (it basically requires calling the IRS), and I imagine similar advice still applies.
Taxing business rewards
While the same general rules apply if you’re earning rewards on a business credit card, there are some important distinctions there, at least in theory. It’s probably best explained in the form of an example.
If you have a $1,000 business expense and you earn rewards worth $20, should you be able to deduct $980 or $1,000 of that business expense? Some would argue it should be $980, since your business isn’t incurring that $1,000 expense completely.
At the same time, that’s a complicated topic, since business cards sometimes have rewards that go to the owner, and sometimes have rewards that go to the employee. So you’d think different restrictions would apply based on who is earning the reward.
Based on everything I’ve read, this is a gray area, and the IRS doesn’t even seem to have clear guidance on this. So you’ll want to consult your tax professional.
Our tax system is really complicated
Once again, I say this as a non-tax professional, but I think it’s also worth pointing out that our tax system is really complicated, and at times there are a lot of gray areas. So again, consult your tax professional, as the above is just a general overview of how this stuff works.
Bottom line
The way things stand as of now (and that can always change) is that a vast majority of rewards points (whether earned through credit cards, flying, staying at hotels, or most other activities) aren’t taxable. This is largely because rewards points and even cash back are viewed as a rebate on a purchase.
The exceptions are when something is an incentive rather than a rebate, be it a sweepstakes, a reward for referring someone to something, or many bonuses for opening checking accounts.
Related question:
If you use points for a business expense, is it tax deductible? If so, how much?
An example would be when Ben uses points to book "pure review" trips, since these are solely for the business purpose of providing content for his blog.
You note that you are not a tax professional then you either should not have addressed this topic or should have consulted a couple of tax professionals for this article because otherwise your comments are the same as what most people already know or can acquire online. This said, your article reminds me of a case where a bank account of some sort offered AA miles instead of interest and customers were sent a 1099....
You note that you are not a tax professional then you either should not have addressed this topic or should have consulted a couple of tax professionals for this article because otherwise your comments are the same as what most people already know or can acquire online. This said, your article reminds me of a case where a bank account of some sort offered AA miles instead of interest and customers were sent a 1099. Regarding the business income, you are only supposed to use those rewards for business purposes anyway...
Your username is "I am here", but we're all asking "why?" I didn't see anyone call for an insufferable asshole, yet here you are.
All miles/points earned on OPM should be taxed as income. Period.
To your comment that you've been asked to testify, curious if you have?
In Germany the tax office assumes that there is a monetary advantage for individuals who earn their miles on business trips but redeem them for private trips.
In fact Lufthansa pays flat taxation rates on behalf of the Miles & More members to cover this.
And certainly there is. But, I find it nitpicking. My employer can throw a party, deduct the cost in determining taxes, but I have no taxable income by eating three dozen shrimp.
In Germany you would be taxed for the 36 shrimps. Your employer is allowed a certain (low) amount of spending for “employee motivation”, which can be free soda or a pizza party etc. but outside business dinners (with other companies!) either emplyees have to declare free food etc. as a benefit in their taxes or the company has to pay the taxes for the employee.
If you think about it this is a smart move....
In Germany you would be taxed for the 36 shrimps. Your employer is allowed a certain (low) amount of spending for “employee motivation”, which can be free soda or a pizza party etc. but outside business dinners (with other companies!) either emplyees have to declare free food etc. as a benefit in their taxes or the company has to pay the taxes for the employee.
If you think about it this is a smart move. I as an employee would calculate free food as a benefit and if two similar employees want to hire me for the same rate, I would choose the one with the free food, though neither he nor me has to pay for it. Go further and you have companies giving me free TV, PC for privat use etc. and a lot of money can circumvent the taxes.
For what it's worth, yes, the business side is murky. However, if you are following program rules, points earned from a business card are generally only supposed to be used for business expenses. Therefore, the reason the IRS doesn't invest much time or effort into this is because points travel would be theoretically replacing what would otherwise be a deductible business expense. If you use points earned from business spending for personal travel, it should...
For what it's worth, yes, the business side is murky. However, if you are following program rules, points earned from a business card are generally only supposed to be used for business expenses. Therefore, the reason the IRS doesn't invest much time or effort into this is because points travel would be theoretically replacing what would otherwise be a deductible business expense. If you use points earned from business spending for personal travel, it should be included in the value of taxable compensation. Big picture is that these programs are generally considered "de minimus" transfers, where it isn't worth anyone's time or effort to try and tax.
Nice to have someone pop in with an answer like this. Also, there's a simple issue in trying to tax FF miles used by an employee earned on employer-paid travel: there's not an easy-to-follow paper trail (which is, of course, an electronic trail today). Simply, how would the IRS know I used FF miles earned on business travel for my vacation? They could try to make employers issue a 1099 for the miles earned each...
Nice to have someone pop in with an answer like this. Also, there's a simple issue in trying to tax FF miles used by an employee earned on employer-paid travel: there's not an easy-to-follow paper trail (which is, of course, an electronic trail today). Simply, how would the IRS know I used FF miles earned on business travel for my vacation? They could try to make employers issue a 1099 for the miles earned each year. But, how do you value them? How does the employer even know how many miles you earned? So, you're right, it'd be a low yield use of IRS resources to try to do it. And, it's small potatoes anyway. Why worry about this when you don't tax employees on food/drink they get free at the company Xmas party? Yes, a very small cadre of business flyers earn many thousands dollars worth of miles on business travel. But, compared to what they're paid, it's easy to group it amongst the small (on a percentage basis) side job benefits of many jobs.
Crying in Scandinavian where everything is taxable and taxed...
A simple tax system with no loopholes that pays for great serviced, including healthcare that allows people to live 3 plus year longer, would be very welcomed by most Americans instead of this Byzantine system that nobody can figure out and which funds very little useful services (unless you find interminable presidential election campaigning as being useful)
Scandinavian countries tend to have higher income tax at all levels, plus high VAT tax on anything you order from outside the country. Most Americans would HATE this.
The US tax system itself is not complicated. What's complicated and what everyone is actually talking about when they say the tax code is full of loopholes, is what is defined as taxable income. The actual income tax schedule itself fits on half a sheet of...
Scandinavian countries tend to have higher income tax at all levels, plus high VAT tax on anything you order from outside the country. Most Americans would HATE this.
The US tax system itself is not complicated. What's complicated and what everyone is actually talking about when they say the tax code is full of loopholes, is what is defined as taxable income. The actual income tax schedule itself fits on half a sheet of paper, and for most Americans all you need to file taxes is your W-2 and maybe some 1099s from your banks. All the hard work of figuring out withholdings is already done by your employer. I'm convinced that 99% of the outrage over "complicated" US taxes is from crypto-bros mad that their gambling coins are now taxable and self-employed people who don't withhold what they owe the IRS.