Are Credit Card Rewards Taxable?

As you prepare your taxes, you might be wondering if you owe taxes on any credit card rewards or cash back dollars you may have received over the last year. The short answer is “probably no,” but unfortunately the IRS has provided no definitive answer and I’m of the belief they prefer it that way.

The only hint that we have is a private letter ruling from 2002 (PLR200228001) that stated that “The rebates are not includible in Taxpayer’s gross income, whether they are donated to charity or retained personally.” The taxpayer’s original inquiry appears to be whether charitable contributions made in credit card rewards were legitimate deductions (they are) and the IRS continued to state that the rebates are not included in gross income, which is to say that credit card rewards are not taxed as income. A PLR is only applicable to the taxpayer it is sent to but this gives us a good idea of the IRS’s thinking. (earlier that year, the IRS stated that they would not be taxing frequent flier miles)

Finally, in IRS Publication 17, the IRS has stated that a cash rebate on a purchase is not considered income. Tax professionals, in general, are of the belief that credit card rewards and cash back fall into the cash rebate category, rather than the earned income category.

Jim writes about personal finance at


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  1. DRW says:

    Taking it a step further then .. wouldn’t an item on sale constitute income for the buyer?

    • partofme says:

      They change their mind if you take it to the logical conclusion. If it’s given to you, it’s income worth the full retail value. Big discontinuity.

      • Sam2k says:

        If something is given to you then it is a gift and is not taxable. Unless of course you’re saying that for some irrational reason the COMPANY is giving it to you, in which case it would be taxable at its current retail value (ie sales price).

        • partofme says:

          Irrational reasons like… marketing purposes? I was on campus one day at my undergrad institution, and a new start-up t-shirt company was handing out free t-shirts. I was also in the process of doing my taxes, and I realized the weird idiocy that this is income, and taxes should be paid on it. For full retail value. If they charged me a penny or more, it’s not. Basically, there’s a discontinuity at zero. Granted, what had me thinking about this was the nice “gift” of free room/board that my university gave me… which I had to pay taxes on. The idea of “you pay taxes on what you would have had to pay…. if you had to pay it” still doesn’t quite fly with me. But the government is a living contradiction.

          • RandomHookup says:

            The policy came about because of the tendency of people to look for ways around it. Providing you housing in lieu of paying you a salary (in a work situation) was a way of getting around paying taxes for it. If your company provides all your meals or your car or pays your utilities, then you received something of value that you would have paid taxes on if your company paid you the cash equivalent instead.

            Most of the IRS rules developed because someone figured out a way to avoid paying taxes for what was really given in exchange for work.

            • JollyJumjuck says:

              Really? I thought most of the rules developed in order to stick it to the little guy.

            • partofme says:

              That’s great and all, supposing it’s an exchange-for-work situation. But the same rule applies to free t-shirts and a scholarship including a free room. You’re not providing either giver with work in exchange. They’re simply giving you a steep discount on their product. And if you don’t take their free room, they’re not going to pay you a salary to make up for it. You’re just on your own. If you don’t take their free t-shirt, they’re not going to pay you a salary to make up for it. You’re just gonna be shirtless. What’s so hard about dividing things into categories of compensation for goods, compensation for services, and investments?

              • RandomHookup says:

                The same rules don’t apply to free t-shirts (nominal gifts aren’t taxable, even if they come from your employer). I can’t really speak to the college room & board situation as I’m not sure of the logic. I was really speaking to the corporate aspect of the situation and probably should have replied to the other comment.

          • Sam2k says:

            I’m not going to defend the taxability of room and board because its not exactly rational considering wherewithal to pay, but I can at least explain it. Basically, you have to look at substance over form. In form you’re just getting free room and board. However, in substance you are being charged for room and board and being given money to cover it. So the money received is taxable under the all-inclusive income concept and the expense of paying for the room and board is not deductible because personal living expenses are never deductible.

    • ekzachtly says:

      Only if you didn’t read the article and didn’t notice that the conclusion is “credit card rewards do not constitute taxable income.”

    • Jesse says:

      In short, no. Discounts are not considered income. The logic with credit card rebates is that the discount is deferred and paid by the credit card company for using their card.

    • Coles_Law says:

      I’d go with no. Here’s my logic. Say you earn $1000 from your job. The IRS will tax you on that. Let’s say you use a credit card to buy $1000 worth of goods that were on sale from $1500. The card gives you 2% cash back, or $20. If the reward and items on sale were considered income, you’d be taxed on the $1000 you earned, the $20 you got back, and the $500 you saved-your $1000 in income would be taxed as if it were $1520. You’d be getting hit twice, so to speak.

  2. Sam2k says:

    My interpretation is that credit card rewards fall unter capital recovery. ie If you sell an item you not taxed on the proceeds until they exceed your purchase price less any allowable depreciation (why most items sold at a yard sale are probably not taxable). So your credit card rewards should be treated as a discount and allocated to the basis of each item you purchased that year.

    • TheyCallMeMcGyver says:

      Using that reasoning, I wonder at what point the profit of any sold used item constitutes capital gains. What about, for example, those phenomenal items on the Antique Roadshow where the person purchased the item for pittance, or where the found they item in the garbage but it is worth hundreds, or thousands? If they sold that item, would that constitute capital gains, thus, requiring the seller to report it to IRS?

      • TheyCallMeMcGyver says:

        Sorry about the typos in my previous post

      • EarlNowak says:

        Yes, they usually do constitute capital gains. The trick is calculating basis. If it’s an item you inherited, basis is calculated as it’s fair market value at the date of death of the decedent. This usually results in little to no gain. But if it’s a hummel you bought at a garage sale for $5, then the difference between your purchase basis and sale value is considered capital gain.

        In fact, antiques are considered collectable and are taxed at a higher rate than ordinary capital assets.

      • RandomHookup says:

        Just about anything you sell for more than you paid for it is taxable, but, unless you make it your business to sell such things, you can’t take a loss if you sell it for less.

    • wsupfoo says:

      I just cashed a $600 check from a rewards card I use for business travel (I didn’t even sign up for it, thank you Chase). All of those expenses are reimbursed, so I don’t think one can call it capital recovery. I doubt they’ll ever figure that out, although considering I float those expenses for a month until they’re repaid, maybe it IS a form of capital recovery. I have to admit, I’ve been pondering whether I need to report it.

      • Sam2k says:

        In this situation, your rewards WOULD be taxable because you have fully recovered the cost of the the purchased items and then received the cash/rewards on top of it. So you’ve exhausted your capital recovery when employer reimburses you. If, for some reason, your employer did not fully reimburse you for the expenses and the amount that you were not reimbursed exceeded the amount you received as cash back then I think you could reasonably excluded it. Otherwise, the government considers all income to be taxable unless specifically excluded by congress and the only applicable exclusion I can think of is capital recovery.

        As far as the Antiques Roadshow senario goes, it depends entirely on how you acquired the valuable collector’s item. If you purchased it then what you must report as income is equal to what you sell it for minus what you paid for it. If it was a gift then your taxable amount is what you sold it for minus what the giver paid for it. If it was inherited then your taxable amount is what you sold it for minus its FMV at the date that you received it.

  3. Bog says:

    There’s two answers to this.

    1) Yes, Everything is or can be taxable. There is no limitation to what the government may or may not decide to tax.

    2) No, It’s not income, its a refund or rebate, or like using a manufacturer’s coupon. Then again go back and see #1 if the government decides to change there mind.

  4. freelunch says:

    Here’s the question – does the credit card company issue you 1099-misc?
    cash back is a rebate on the purchase price…
    for airline points the question comes up of what is the “fair market value” of the points when they are received?
    What about membership loyalty programs? would you call them ‘payments’ or would you consider them a discount on total usage when you get a free hotel room?… obviously they aren’t losing money when you use the loyalty program, so logic would state that the margins of your stays as a whole are paying for your point reward stays.

    Always consider the spirit of taxes rather than the letter of the tax law when walking the gray areas.
    If I earned the money, and spent it, and received a ‘cash-back’ refund on 2% of the spending, taxing it would mean that any delayed discount is taxable. that doesn’t sound like the spirit of an tax system we have in place.

    • RandomHookup says:

      An interesting discussion on the point would be if your employer paid the credit card and you received the rebates (or frequent guest gifts) personally.

    • brandymb says:

      “Always consider the spirit of taxes rather than the letter of the tax law when walking the gray areas.”

      Its called an evil spirit.