Are Rewards Points Taxable?

Filed Under: Advice, Credit Cards

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. šŸ˜‰ You’ll want to consult a tax professional for your own situation.

When rewards points aren’t taxable

As a general rule of thumb, airline miles, hotel points, and credit card points arenā€™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 generally 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 (and early this year credit card issuers sent out 1099s for this)
  • In most circumstances if you earn points for openingĀ a checking or savings account (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.

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… šŸ˜‰

Credit card rewards: cash back vs. points

While we’ve established that generally speaking credit card rewards 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 make 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, several years backĀ View from the WingĀ 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.

For example, for 2018 Amex and Chase sent out 1099s for those referring people to credit cards, while they didn’t do that the previous year. That really gives you a sense of how it’s not just consumers confused by the laws, but also big companies. Our new tax code only makes a lot of this even more complicated.

So again, consult your tax professional.

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.

Comments

  1. Delta JFK-BOM flights are bookable. With a huuuuge error fare. From cities in Canada it can be as low as 454CAD for a return in economy.

  2. An excellent summary. To add, where employees earn (personal) frequent flyer miles from business travel, the IRS has taken the opinion (Announcement 2002-18) that while theoretically some portion of this should be taxable, it isn’t worth pursuing collection given the administrative complexities.

  3. The general idea is that discounts and rebates are not taxable, and miles and points generally are a form of discount or rebate. In my opinion, that argument goes only so far, but anyway, that’s what the IRS has said.

  4. This story would have been a little more timely if it had been published prior to April 15.

  5. @Lucky ā€” Did you ever take the lawyers up on their offer and serve as an expert witness? Are these tax disputes or divorce cases? Just curious about that aside. šŸ™‚

  6. They should be taxed for those who are rich with points or bonuses should be punished and taxed heavily for the benefit of the poor and homeless. However, it is too cumbersome to administer so I don’t favor it.

    Like in the Eisenhower administration of the 1950’s when tax rates were as high as 90%, 90% of one’s miles should be taxed. Why oppose this?

  7. It would be interesting if you did a piece on taxation on points across the world (in a selection of countries). In Norway all points earned flying for your employer, and points earned on credit cards for work, are taxable. They made it the employers responsibility to report this from 2019. You only report when you spend the points, and to get the value of the points your using, you have to compare it to a paid fare thats available the same day you book your own flight. Administrative nightmare tbh.

  8. @ John, You are correct that a difference exists. While most miles and points are not taxable when earned (in 2002, IRS would have loved to tax FF miles but could not agree on a value calculation or a way to track them).

    In Divorce, it’s a grey area but for other reasons. Often one spouse will try to make the case that miles should be split as a marital asset acquired during the marriage, same as a couch or an IRA. The problem comes in in valuation and the fact that airline program rules state that the airline owns the miles, you just possess them for as long as the airline wishes. Certain airlines refuse to split an account even under Court order. In that case, the parties usually back off once Jane realizes she will have to ask John for miles years later when she wishes to travel. There are usually bigger fish to fry in a divorce case and the emotional response of “I’m going too take his/her miles wears off.

  9. I have a real problem with the whole concept of points being taxable. Often in the T&C of the loyalty program, it states that the points have no cash value and in many cases are not even considered to be your property. In most cases, these points can be revoked, in some cases can expire, and be devalued for just about any reason and at any time. The whole purpose of the loyalty programs is as an incentive for you to establish a relationship and to maintain that relationship. I believe it is a stretch to call it compensation.

Leave a Reply

Your email address will not be published. Required fields are marked *