You just opened a new credit card account with a favorite bank. As a reward you receive 30,000 airline miles.
Wait! – are these taxable?
Actually, maybe, unless the bank was Citibank and they sent you a 1099 MISC form. If so, consider them taxable, pay the tax, and avoid exposing yourself to an audit. If it was another card issuer, well, there are several problems.
What are they worth? Citibank says there miles are worth 2.5 cents each and sends you a 1099 MISC to prove it. According to bank officials, the IRS requires that taxpayers who receive gifts or prizes in excess of $600 must pay taxes on the value. The miles in question were $25,000 miles the bank gave if you opened an account. Had Citibank valued them at just $0.02, they would have been worth only $500 and would not have been reported.
However, what is a mile worth for Capitol One or American Express? Even the IRS admits it does not know. Other card issuers are not issuing 1099 MISC to their customers so they apparently do not know or do not consider them taxable as a gift or prize. According to the IRS not all airline reward miles are taxable.
When Airline Rewards Are Taxable
|Airline Reward Category||Taxable|
|Miles awarded as prizes||YES|
|Miles awarded as a promotion for opening an account, such as a bank account||YES|
|Miles awarded in connection with business travel||NO|
|Miles awarded by the airlines in return for flying with them.||NO|
|Miles awarded as a promotion for putting money in a mutual fund||YES|
|Miles awarded in connection with credit-card use||NO|
Companies sometimes run a sweepstakes for customers and winners receive a number of airline miles as the prize. According to the Internal Revenue Service this is akin to winning a lottery prize and it is a taxable event.
Promotional miles awarded for opening an account with a credit card issuer is, according to the IRS no different than if a bank gave you a toaster or television when you open an account, it is a valuable inducement and is a taxable event.
Years ago, the IRS ruled that mileage awarded in connection with business traveler is not taxable. Further, they said if they changed their mind they would issue a notification. Since they have never issued a notification a change these miles are not taxable.
When you fly with an airline and are a member of their frequent flier club, you earn miles for flying with them. However, the IRS views these miles as a rebate and deems them non-taxable.
However, if you open a mutual fund and are rewarded with credit card miles, the IRS wants you to pay taxes on them. As with a bank account, it is like getting a toaster.
But, miles you get for you using card are not taxable. Those the IRS considers to be a rebate and as of now, rebates are not taxable.
The problem though, is what are taxable miles worth. Other than Citibank, no other credit card company has put a value on miles nor do they issue a 1099 MISC. Accordingly, most people do not pay them as they believe their miles are not taxable. Check with your tax advisor for up-to-the-minute advice.