Would my credit card cash reward be taxable?

November 29, 2023 5:06 PM

I’ve accrued cash/rewards on my credit card over the years, and would love to cash it out. The rewards were earned from purchases with my card. I’m a bit unclear if this redeemed cash reward would be taxable. YANML.

The amount I’d redeem would be more than $600. I did some research online, and most sources say that cash rewards from credit card programs are considered rebates and therefore non-taxable. However, the brochure says that rewards could be taxable (emphasis mine).

I’m not sure where to ask or how to reach a tax professional, so figured I’d reach out to the Green and see. YANML/tax professional but hey, worth a shot.

Thanks, and happy almost December! Can’t believe 2023 is almost over, it’s been a hell of a year!

posted by dubious_dude to Law & Government (6 answers total)

I earn a fair amount of credit card rewards and wouldn't think twice of it until I receive some sort of 1099 form from the bank. For example, various deposit bonuses get me a 1099-INT or 1099-MISC at the end of the year, but I don't think I've ever seen a tax form for statement credits.
posted by Nonsteroidal Anti-Inflammatory Drug at 5:37 PM on November 29, 2023 [6 favorites]

Rebates are not taxable income even if it is a credit card company paying the rebate, not the original store. If your credit card pays a percentage "cash back" or points based on how much you spend, that's a rebate.

This determination letter from the IRS further describes what happens if you make a charitable donation with your rebate, but explains the original point as well.
posted by muddgirl at 6:30 PM on November 29, 2023 [8 favorites]

I am one of the probably millions of people who redeems at least that much in credit card rewards every year, and it has always been my understanding that it is nontaxable for the reasons muddgirl says. If you get bonus cashback on e.g. a *debit* card, that usually counts as taxable interest (and you will get a 1099), but credit card rewards don't get taxed. It's weird and arbitrary that credit card rewards are not taxed, and who knows, maybe in the future the IRS will change their mind, but you will not owe taxes on those rewards.
posted by mskyle at 4:18 AM on November 30, 2023

It's not that arbitrary. It's treated as an adjustment to the purchase price. If you buy a boat for $5000 and get $100 in a rebate, this is equivalent to buying a boat for $4900, and has the same income tax implications (none).

Where it might get complicated is if the initial purchase was tax-deductible (or eg reimbursed by someone else). If I buy a Business Machine for $2000 and get a rebate of $50, I can deduct a business expense of $1950 and report no income, OR I can deduct a business expense of $2000 and report $50 in income, which are equivalent. But I can't both deduct the full cost and not report the income, as that's double-dipping.

In practice, I suspect these principles are widely flouted, because keeping track of it all is complicated, and you can easily plead ignorance. If I were writing the tax code, I'd probably just make rebates taxable. Want to give a discount? Just do it in the original transaction and stop messing around.
posted by alexei at 11:53 AM on November 30, 2023

I have heard that if you get a bonus for referring someone to a card that that is taxable income even if the bonus is in points. Presumably you would receive some kind of tax form from the cc issuer. I have not gone through that as of yet.
posted by amanda at 12:06 PM on November 30, 2023

Just to concur with the other answers: my understanding is that since the points are redeemable for cash, they're considered to have a cash-equivalent value. So if they were taxable then you would have been receiving 1099s and being taxed on them when you earned them, not when you redeem them.
posted by teraflop at 9:33 AM on December 1, 2023