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The IRS typically treats credit card rewards as a discount or a rebate rather than taxable income when they're earned from making purchases. This means that points, miles or cash back earned from typical credit card use are not considered taxable for most people.
- The IRS sees credit card rewards and miles from regular purchases as rebates or discounts, not taxable income.
- Sign-up bonuses linked to spending are also treated as rebates. However, bonuses given without a spending requirement can be taxable.
- Rewards earned from non-purchase activities, like referring friends or participating in promotions, can be considered taxable, especially if they exceed a value of $600.
Are Credit Card Points Taxable?
If you earn rewards, cash back or points from regular credit card purchases, they are generally seen as a price reduction or rebate. For example, if you spend $100 and get 2% ($2) cash back, the IRS views it as though you've only spent $98.
Are Credit Card Sign-up Bonuses Taxable?
Receiving a reward or bonus for opening an account that's contingent upon you making a specific amount in purchases (e.g., "Spend $3,000 in the first three months to get 30,000 points") is typically treated like the regular rewards from purchases — as a rebate.
However, if a bank offers you a bonus for opening an account, and there's no spending requirement, it might be considered taxable income, and the bank may issue a Form 1099-INT or another appropriate form to report it.
Are Rewards From Referrals or Promotions Taxable?
If you receive rewards or bonuses from activities other than making purchases, like referring friends or participating in promotions, determining their taxability becomes less clear. Depending on the situation, these rewards could be considered taxable.
Are Credit Card Miles Taxable?
Miles earned from credit card purchases or directly from airline loyalty programs are typically viewed by the IRS as rebates or discounts, not taxable income. This is true whether you earn the miles as a sign-up bonus or through spending.
Additionally, here are some transactions and how these are treated:
- Redeeming Miles: When you redeem airline or credit card miles for flights, upgrades or other travel-related rewards, there's generally no tax implication. Essentially, you're using a rebate that you earned earlier.
- Selling or Transferring Miles: Some people consider selling or transferring their miles, but many airline terms and conditions prohibit or restrict this. It might be considered taxable income if you somehow profit from selling miles. However, since selling miles can violate the terms of many loyalty programs, it's a risky idea.
- Receiving Miles as a Prize or Gift: If you receive miles as a prize (for instance, from a sweepstakes or contest) or as a significant gift, they could be taxable. In such cases, the organization awarding the miles might issue a Form 1099 to report the fair market value of the miles to the IRS.
- Purchasing Miles: If you buy miles from an airline or a credit card program (often offered as a way to top up your balance), this is typically a straightforward purchase without tax implications. Yet, potential complexities may arise if the miles you purchase result in a rebate or cash-valued discount, such as a free flight. However, the initial purchase of miles remains non-taxable.
- Miles as Compensation: If an employer provides miles as compensation, they could be considered taxable, similar to any other form of income.
Do You Pay Taxes on Cash Back Rewards?
Credit card rewards earned from purchases don't need to be included in your tax return, as the IRS considers them as rebate reward payments. However, rewards obtained without spending should be listed as part of your taxable income.
If the non-purchase rewards' value exceeds $600, your credit card provider should send you a Form 1099-MISC. Some institutions might even send this form for amounts less than $600. Getting this document signals that those rewards should be declared as taxable income.
Yet, no matter how small the value of rewards not tied to spending is, and irrespective of whether you get a Form 1099-MISC, you must declare these rewards when preparing your taxes.
While most credit card rewards derived from spending are tax-free, cardholders must be vigilant about rewards or bonuses not tied to spending. These might have tax implications. If in doubt, especially when receiving a Form 1099-MISC from your bank or credit card provider, we recommend reporting these rewards in your tax return to ensure compliance with the IRS. Always consider consulting with a tax professional when you're unsure.
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- Internal Revenue Service. "About Form 1099-MISC, Miscellaneous Income." Accessed August 24, 2023.
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