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.
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.
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