Credit card rewards can feel like income, but they are not. Reward credit card users can earn points, miles, and cash back when they sign up for a new card and when they use their card for spending. But are these rewards taxable? The clear consensus is no.
Why credit card rewards are not taxable
To earn credit card rewards, cardholders need to spend money. And of course, the rewards earned are never as valuable as the money spent. Therefore, these rewards do not represent income, but rather a discount on a purchase. And thankfully, Uncle Sam only considers income taxable, not discounts. Otherwise, we would have to tabulate every coupon we used and the value of every sale we took advantage of.
When bank rewards are taxable
Unlike credit card rewards, banks can report as taxable income incentives received from opening a retail checking or savings account. For example, some banks will offer $1o0 or more to those who open up a new account, much like they once offered free toasters. But eventually, taxpayers will receive a 1099-Misc form indicating interest earned that is reported to the IRS.
And while technically these rewards are not interest, it still represents income earned from a bank account and is considered taxable. In fact, Citi has even taken the controversial step off issuing 1099-Misc forms to those that earned airline miles from some of their retail accounts. But thankfully, there have been no reports of Citi or any other credit card issuer reporting points, miles, or cash back as income.
So do not be afraid to maximize the value of credit card sign up bonus or rewards from spending. So long as cardholders do not spend more to earn rewards, and they pay their balances in full, these credit card rewards are just money in the bank that the IRS won’t touch.