Are Credit Card Rewards Taxable?

Although there are dozens of types of credit card rewards ranging from airline miles to cash back to transferrable points, all rewards fall into two categories when it comes to taxation:

1. Rewards that are treated as rebates on spending
2. Rewards that are treated as income in exchange for performing a service

From a redemption perspective, you may treat both types equally. However, the IRS treats these two categories differently. You will not be required to pay tax on the cash value of rewards considered rebates.

However, rewards considered income will be treated the same as other income and is taxed similarly to more traditional income, like wages earned at a job.

Bank Account Signup Bonuses

Many banks offer incentives for signing up for a new account—usually this comes in the form of cash deposited into an account, but some banks instead offer rewards points and frequent flyer miles to new account holders.

Regardless, rewards of this type are considered interest income for a bank account and customers should receive a 1099-INT form showing the value received. Often, rewards points and airline miles are valued at 1 cent each for this purpose so a 50,000-point bonus would be taxed as $500 of income.

Refer-A-Friend Bonuses

If a bank or credit card offers rewards points or a cash bonus in exchange for referring other people who open a new account, taxes must be paid on the rewards earned. That’s because these are issued in exchange for performing a service—in this case, you’re earning a commission on helping the bank get a new customer or sell a new product.

1099-MISC Form

When bonuses are treated as income, you may receive a 1099 miscellaneous income tax form from the issuing institution. This form summarizes the amount of income you earned and must be entered when filing your annual taxes.

Occasionally, you may not receive a 1099-MISC form for taxable bonuses if you earned less than $600. Even if this happens, you must still report the income and pay taxes on the appropriate amount.

Thankfully, most points and miles you earn aren’t considered income by the IRS, which means they aren’t taxable.

Rewards Earned From Credit Cards

In many cases, there’s no need to pay taxes on miles, points or cash back earned from a credit card—regardless of whether it’s a bonus for opening a new account or rewards for everyday spending. That’s because purchases must be made to earn those rewards and as a result, the IRS considers them a rebate or a discount rather than income. Just like we don’t have to pay taxes on the value of a coupon, we don’t have to pay taxes on rewards we earn in exchange for buying something.

This also applies to welcome bonuses for opening a new credit card since customers generally have to spend a certain amount of money or make a certain number of transactions to receive a bonus.

Be aware that a court ruling states that credit card rewards can be taxed in some special circumstances. Specifically, this may apply if the cardholder earned rewards by purchasing cash equivalents like prepaid debit card reloads and money orders. This isn’t likely to affect anyone making an occasional cash equivalent purchase; the couple in the case where the ruling was decided had earned over $300,000 in cash-back rewards after buying over $6 million in cash equivalents with rewards credit cards. While this couple escaped the bulk of their tax bill due to the vagaries of IRS regulations on the subject, it’s still a cautionary tale about the mess you can get into if you engage in large dollar amounts of manufactured spending.

There’s another exception you should be aware of: If you make work-related purchases on your personal credit card and are reimbursed for those purchases by your employer, any cash back you earned from that purchase could be considered taxable income.

Miles Earned From Traveling

Miles, points and other rewards earned from traveling are seldom taxable. If rewards are earned for personal travel, they’re treated like a rebate (just like credit card rewards). Miles earned from business or government travel could theoretically be treated as income, but the IRS issued guidance in 2002 saying there are too many details to figure out to make it worth its time. While the IRS could change its position on this, it’s been this way for a long time, and any changes would only apply to future years.

Only taxable income must be reported on your tax return, and most credit card rewards aren’t taxable. That means most people don’t need to report their credit card rewards on their tax returns. However, if you applied your credit card rewards toward a purchase that you intend to claim as a tax deduction, you must reduce your deduction by the amount of the credit card reward you used.

If your credit card rewards fall into one of the narrow cases in which they are considered taxable income, you must report them on your tax return. If you’re unsure how to report them or whether you should, it’s best to consult a tax professional who can advise you.

Do I Have To Declare Credit Card Cash Back on My Tax Returns?

No, you don’t have to declare credit card cash back on your taxes because the IRS doesn’t consider it taxable income. Instead, the IRS considers cash back to be a rebate.

For small business owners, credit card rewards may have tax implications. If you buy something for your business and deduct it on your taxes, or sell it later, the dollar amount you need to use for calculating your business’ deduction or profit should be the price you actually paid after discounts and rebates—including credit card rewards earned on the purchase. This also applies to items paid for with rewards points.

Though businesses don’t need to pay tax on the rewards directly, they may still pay a bit more in taxes since they can only deduct the net cost of an item rather than the full value.

In most cases, when earning rewards for spending money, there’s no need to worry about paying taxes on them since they’re treated as a rebate or discount. Earning rewards or cash for something else, though, like opening a new bank account or referring a new customer, is considered taxable income whether you receive an official tax form or not.

Forbes Advisor Credit Cards Writer Lisa Maloney contributed to this article.