In the United States, credit card rewards are generally not considered taxable income for U.S. federal income tax purposes. However, the rewards may be considered taxable income depending upon how they are earned.
The rewards are generally characterized as one of the following three options:
- Rewards for Spending Money
- New Account Bonus Tied to Spending Requirement
- Sign-Up Bonus for Simply Opening a New Account
Let’s examine the current IRS rules and some details for each category with examples.
What are the IRS Rules?
The IRS has yet to publish much guidance surrounding this issue. However, we do have IRS Revenue Ruling 76-96, which addresses whether taxpayers must include rebates in their gross income.
Under this ruling, an automobile manufacturer wanted to incentivize new customers to purchase or lease a new vehicle. If a new customer bought or leased a new car, the customer would receive a cashback rebate. The IRS determined the cashback rebates are not included in the purchaser’s gross income. However, the cash rebate would be a reduction in the vehicle’s cost basis.
For example, John Doe purchases a new car for $20,000 and drives it home the same day. Two weeks later, John receives a cashback rebate of $2,000. The $2,000 is not taxable income for John; however, the $2,000 reduces his cost basis in the vehicle to $18,000 (i.e., $20,000 purchase price minus $2,000 rebate). If John sells the car for $19,000, he must recognize a $1,000 capital gain on the transaction (i.e., $19,000 sale price minus $18,000 adjusted cost basis).
Credit Card Rewards for Spending Money
Many credit cards will give you rewards or points for credit card charges. These rewards may include cashback, points, miles, or discounted goods through the company’s e-commerce store.
For example, assume you open a new credit card on June 1, 2023, which gives you 2 points for every dollar spent at gas stations and restaurants and 1 point for every dollar spent on all other purchases. In June, you only used the credit card once to purchase a TV for $1,200, which earned you 1,200 points. You convert the 1,200 points into a cash statement credit worth $5. After the conversion, the outstanding credit card balance is now $1,195, and your points balance is zero.
In this example, the $5 cash credit is not taxable income. The $5 is a nontaxable rebate or discount on the purchase price of the TV. It would be the equivalent of purchasing the TV for $1,195 even though its fair market value (FMV) is $1,200.
New Account Bonus Tied to Spending Requirement
If a sign-up bonus is contingent upon a required spending amount (e.g., spend $5,000 in the first three months and get 50,000 additional points), the bonus is treated as a purchase rebate and is also not taxable.
For example, assume you open a new travel rewards credit card on June 1, 2023, which gives you 1 point for every dollar spent and 2 points for every dollar spent on airlines or hotels. The terms also provide that if you spend $5,000 within the first three months, you’ll receive an additional 25,000 bonus points. After three months of using the card, you’ve spent $7,500, so you receive the 50,000 bonus points. Receipt of the bonus points and subsequent conversion into statement credits or other rewards is not included in your taxable income.
Sign-Up Cash Bonus for Opening a New Credit Card
If you receive a reward or bonus without spending requirements (e.g., open a new account and receive $100 just for signing up), this reward would be included in your gross income. The same rules also apply to new bank accounts or brokerage accounts.
For example, assume you want to open a new checking account with Bank ABC. The bank is running a promotion where new accounts receive a $250 cash bonus if they open a new account, deposit at least $10,000, and set up direct deposit for their paychecks.
You open a new account on August 1, 2023, and deposit $12,000. You also update your payroll information with your employer to have your biweekly paychecks deposited into the new account. After two months, Bank ABC confirms you met the requirements and deposits an extra $250 into your bank account. The $250 would be included in your taxable income. The bank may issue you a Form 1099-MISC (Miscellaneous Information) to report the reward.
New Tax Developments in Anikeev v. Commissioner
In February 2021, the U.S. tax court published an opinion in Anikeev v. Commissioner, which addressed the taxability of credit card rewards. In this case, the taxpayers used their credit cards to purchase visa gift cards, reloadable debit cards, and money orders. The tax court addressed the taxability of credit card rewards earned on each of the three different types of purchases.
The tax court highlighted how, in general, credit card rewards earned by purchasing goods and services are not included in a taxpayer’s gross income. However, rewards earned by purchasing cash equivalents may be taxable. So, are gift cards, reloadable debit cards, and money orders cash equivalents, or are they goods and services?
Ultimately, the tax court determined that purchasing Visa gift cards was a good or service, so they are not cash equivalents. Any rewards earned through the purchase of Visa gift cards may be excluded from taxable income.
However, the tax court found differently for reloadable debit cards and money order purchases. The tax court determined those items are cash equivalents, so any credit card rewards earned for the direct purchase of money orders and cash infusions to the debit cards must be included in the taxpayer’s gross income.
What’s the Verdict?
Consumers can safely assume that their credit card rewards are not included in taxable income. However, as discussed above, and as seen in the Anikeev case, there are circumstances where the rewards may be taxable income.
Always check with the IRS or a tax professional if you need clarification, as specific cases may vary. Taxpayers can find more information about what income is taxable vs nontaxable in the IRS Publication 525 (Taxable and Nontaxable Income).