Credit Cards

When Your Credit Card Rewards Are (and Aren’t) Taxable

With tax season in full swing, you’re likely receiving tax documents, including a 1099 form from your financial institution, detailing taxable earnings from interest and the like. You may, however, also be surprised to receive further 1099s for the income you received from opening or using a credit card that earns reward points, miles or cash back.

In certain situations, the Internal Revenue Service (IRS) indeed views bonuses, points and miles to be income. Here we’ll go over the nuances and complications this introduces, and whether you need to worry about having to pay up.

Credit Card Rewards (Generally) Do Not Count As Taxable Income

Let’s start with the good news. The IRS generally considers any and all cash back, points and miles you received by using your credit card to be rebates. For example, if you choose to get 2% cash back on your groceries, that is thought to be as more of a discount, rather than income. The same applies to most credit card signup bonuses, which come with a conditional spend before you can receive them. You are typically required to spend some minimum amount of money within a short period of time to earn your bonus. This, too, constitutes a rebate on those purchases, rather than an outright gift that you have to report as income.

Those distinctions aside, there are also practical reasons for IRS to ease up on taxing personal and business credit-card rewards: It would be really hard to do. Points can be earned in a number of circumstances – they are granted as a signup bonuses, earned through purchase, and a litany of other scenarios. Tracking these things on a case-by-case basis would require an advanced infrastructure, and that simply doesn’t exist.

Rewards For Opening A Deposit Account May Be Considered Income

The taxman can, however, fairly easily track unconditional rewards received for opening a checking or savings account, and treat those as income. Nowadays, top checking accounts come with signup bonuses worth upwards of $500, which represent fairly simple taxable income.

Things get a lot more complicated, though, if you are awarded points or miles, instead of straight cash.

The bank needs to report a dollar value, in USD, for your income. For example, if you earned 10,000 Chase Ultimate Rewards (UR) points, the bank can’t simply say your income was 10,000 UR points – they need to provide the IRS with the amount those points are worth.

Savvy travel hackers may already see a problem with this approach. The value of miles and points isn’t always straightforward. They can have vastly different value depending on how they are used. For example, if you were to use 10,000 Ultimate Rewards points or cash back, you’d get $100 back, because each is worth $0.01. However, in certain situations, Ultimate Rewards points can also be used for travel redemptions, giving them a 25% value boost. Depending on how your bank decides to estimate this value, you may end up over or underpaying for your rewards.

The most fair scenario is likely a bank reporting a value equal to what you got out of the points. This is exactly what happened in the now infamous Shankar v. Commissioner. The Tax Court ruled that ThankYou points earned by the plaintiff represented taxable income equal to $668 – the value of the plane ticket Shankar received in exchange for his points.

Expert Note: A bank may even issue a 1099 before you had a chance to redeem your points or miles. Citibank did exactly that in 2012, when it issued 1099s to consumers who have still not used their rewards.

Joe Resendiz

Joe Resendiz is a former investment banking analyst for Goldman Sachs, where he covered public sector and infrastructure financing. During his time on Wall Street, Joe worked closely with the debt capital markets team, which allowed him to gain unique insights into the credit market. Joe is currently a research analyst who covers credit cards and the payments industry. He earned a bachelor’s degree from the University of Texas at Austin, where he majored in finance.

These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

Advertiser Disclosure: The products that appear on this site may be from companies from which ValuePenguin receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). ValuePenguin does not include all financial institutions or all products offered available in the marketplace.

How We Calculate Rewards: ValuePenguin calculates the value of rewards by estimating the dollar value of any points, miles or bonuses earned using the card less any associated annual fees. These estimates here are ValuePenguin's alone, not those of the card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer.

Example of how we calculate the rewards rates: When redeemed for travel through Ultimate Rewards, Chase Sapphire Preferred points are worth $0.0125 each. The card awards 2 points on travel and dining and 1 point on everything else. Therefore, we say the card has a 2.5% rewards rate on dining and travel (2 x $0.0125) and a 1.25% rewards rate on everything else (1 x $0.0125).