“Can I cash out my points?” is not an uncommon question. We recently looked at what the options are for cashing out points and whether it’s worth doing so in terms of the value you’ll get.
Any discussion on cashing out points leads to a follow-up question: Are there tax implications in doing so? We consulted with a tax specialist to discuss what — if any — tax implications there would be for people who decide to cash out their points.
For more TPG news delivered each morning to your inbox, sign up for our daily newsletter.
Sign up for our daily newsletter
Tax implications for cashing out points and miles
Let’s say you spend money on your credit card in bonus categories where you earn extra points or that you earn a welcome bonus on a credit card. We already know that banks sometimes sound out 1099s for referral bonuses, so what about credit card rewards? Are these taxable?
“There aren’t any tax implications for cashing out your frequent flyer miles rewards under normal circumstances,” according to Chad Mangum, an enrolled tax agent and owner of Tax Preparation Services in Salt Lake City, Utah. He said he had looked into this topic during research for his Master of Taxation degree and on behalf of clients during previous work with multiple tax attorneys.
“The IRS has a longstanding view that rewards are considered a ‘discount’ for goods/services that you purchase,” he said. Miles and points earned as rewards from spending money on your credit cards are not considered cash or cash equivalents, except in extreme situations where cash-equivalent items are involved.
“One tax court case shows a situation where taxpayers went to extremes to accumulate rewards which resulted in over $300,000 of credits,” Mangum added. “The IRS only prevailed in this case because the taxpayers bought gift cards to purchase money orders to purchase more gift cards, essentially ‘gaming’ the credit card rewards system at the time.
“This was a very unique situation where the court’s conclusion stated it excluded the IRS’s credit card rewards standing in its ruling (see: Konstantin Anikeev, TC Memo 2021-23).”
However, Mangum says that simply cashing out your points is not the same. He also points out that the discussion of the tax implications and the discussion of whether or not it’s a “good idea” to cash out your points and miles are two separate discussions.
Of course, there are times when earning points or miles will have tax implications — most notably for those who open a Bask Mileage Savings Account to earn American AAdvantage miles. The rewards you’d earn are considered interest income, and you’ll be issued a 1099 form with the taxable value of 0.42 cents per mile.
The good news is that the IRS does not have a history of seeing credit card rewards as income. From our understanding — and from consulting with an IRS-credentialed tax specialist — most people who cash out their credit card rewards shouldn’t need to claim this on their taxes.
However, if you have questions about tax filing requirements for your particular situation related to points and miles, cashing out your points or anything else, you should definitely talk to your tax preparer or a tax attorney for guidance.