When you earn miles for flying, the miles aren’t taxable because they’re a rebate – essentially giving you back some of your own money.
When you earn miles for flying for work, those miles are basically a rebate of your employer’s money. In theory that should be taxable as income, but it would be really messy, and the IRS has explicitly said they won’t try to tax it.
When you earn miles or cash back for spending money on your credit card, that’s a rebate also and no taxes are due. You’re just getting something back, a small portion of your own spending.
Oddly initial bonuses you earn after getting a new credit card generally aren’t tax-reportable, either. When you’re required to spend money to earn the bonus that could be considered a rebate on your spending (even though it’s rebating a very big proportion of spend). But not all card bonuses require spending, and 20 years ago they almost never did. Yet they weren’t taxed.
When you earn miles for referring someone to a credit card, that’s taxed because it’s not a rebate – it’s essentially a payment to you by the issuing bank for your marketing services paid out in the form of frequent flyer miles. When you earn miles instead of interest from a bank you get a 1099 for that, too.
Until recently mileage checking accounts from BankDirect didn’t send out 1099 forms – but something people often get confused about is that a 1099 doesn’t make something taxable, that form is just information reporting to the IRS. An activity may be taxable whether or not there is a 1099 sent and a 1099 doesn’t dictate taxability (or how much income you’ve received either, you can dispute a 1099).
That brings us to the very interesting tax case flagged by Miles to Memories.
- In 2013-2014 a couple bought over $6 million in gift cards and loading of other financial products on their Amex Blue Cash, earning 5% back.
- They turned their purchases back into cash (via money orders) and used the cash to pay off their credit cards.
- The IRS wanted to tax them on over $300,000 in ‘income’ from their cash back.
The IRS argued this couldn’t be viewed as a rebate, and the tax court agreed – in part. Money orders and reloads of payment cards weren’t purchase of goods or services, according to the court, so rewards earned from those activities were taxable. However Visa gift cards were actual services, and so rewards were a rebate.
The court focused on the specifics of what was acquired, though I’d note as well that Visa gift cards usually come with a fee so – as with credit card initial bonuses – the rebate in question is just very large relative to the purchase.
Furthermore the court recognized the hair-splitting going on here, but attributed that to the backflips done by the IRS in not taxing rewards generally but seeking to do so in this instance. Ultimately the court even recognized that this only became an issue because of the scale and attracting attention,
Petitioners’ aggressive efforts to generate Reward Dollars have created a dilemma for [the IRS] which is largely the result of the vagueness of IRS credit card reward policy.
Petitioners clearly acquired economic benefits by cleverly and relentlessly manipulating the Rewards Program. Their actions never offended American Express and had Mr. Anikeev not been so successful in his efforts he likely would have been ignored by the IRS.
However, the scale of his success in acquiring rewards makes this case an extreme test of the longstanding nontaxability of credit card reward programs.
My sense is that while the folks who earned over $300,000 cash back were successful in doing so back in 2013 and 2014, they wouldn’t be so successful with an American Express card today.
I’d also note that anyone who bought, stay, a million dollars or more in dollar coins from the U.S. Mint is lucky that the IRS cannot audit back that far in the absence of a fraud on the relevant tax returns.
When is comes to taxing points/miles from referal bonuses, don’t banks say “they have no value until redeemed”? Additionaly what happens when you get points for a referral and then the bank shuts down your account? You’ve already paid taxes on something you don’t have and aren’t paid that by the bank when they close it. If the IRS wants to tax referral bonuses it should be done when redeemed, which means they won’t be taxed because it’s not worth the hassle.
It seems to be the court ruling makes it clear that CC funding of a bank account would be a taxable event on the rewards. If CC > MO and CC > debit reload are both taxable per this ruling I just don’t see how CC > bank account is not.
There is no excuse for Amex not catching this and canceling the card.
Next up, tax all points earned whilst flying for work and/or claiming work expenses.
Let’s do this!
Sounds like money laundering
These types of folks are exactly why the AMEX RAT team exists. I can appreciate their efforts and gaming of the system but it is on the level of calling the airline to see if a mistake fare is valid in my book.
The issue with taxing these rewards is there has to be a fixed monetary value to them. Airline miles are worth what? are 50,000 AA miles worth $2,500 when you can use those miles to purchase two round trip tickets BOS to MCO that would sell on the market for $199 ? What happens when airlines devalue those miles? Can a ordinary loss be deducted? when a person dies those miles do not transfer to a spouse thus they are worthless. The airline can close your account at any time, can a PAX sue for the value lost that was included income?
The other issue is individual taxpayers are on a cash basis of accounting. Thus they pay taxes on the income they receive in the year they receive it OR have a right to receive it. That right CAN NOT be revoked. This is how stock options work, when granted a stock option the taxpayer does not pay income taxes on the option until he exercises the option …… thus the taxpayer must have full rights to the stock to trade openly WITHOUT RESTRICTIONS. Airline miles have MANY restrictions , as do Hotel points, restaurant points, credit card rewards etc.
Seems like a loophole used by thousands or more, but being masterfully exploited by this couple has been deemed income. OK, but where’s the line? Who can expect a shakedown next? Significant is just another word for arbitrary