Citi Says Those Free Rewards Miles You Received Are Taxable

If you received a bunch of miles from Citi for signing up for one of the bank’s credit cards or rewards-earning accounts, be on the lookout for a 1099-Misc tax form coming in the mail, as Citi has decided that these miles have a taxable value.

Citi has put a value of around $.025 on each mile, meaning that if you signed up for some program that rewarded you with 25,000 bonus miles, the bank says you owe taxes on $625 of miscellaneous income and it’s telling the IRS about it.

“I’ve been practicing for 25 years and I’ve never had an instance where miles have been treated as taxable,” one CPA tells the L.A. Times’ David Lazarus about Citi’s decision to send out the 1099 forms.

While a Citi rep tells the Times that the bank believes these miles fall under the section of the Internal Revenue Code that “recognizes rewards as taxable income,” a 2002 IRS policy brief states that “the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”

And when Lazarus contacted the IRS for clarification, he was told that the policy brief “still stands.” But while the brief makes it clear — or at least as clear as IRS legalese can get — that the agency won’t go after people for undeclared frequent flier miles, it doesn’t say what will happen if people who receive these 1099 forms from Citi don’t include that amount on their tax returns.

Citibank deems frequent-flier miles taxable, but does the IRS? [LA Times]