Are Credit Card Rewards Considered Taxable Income?

Reviewed by Thomas J. CatalanoReviewed by Thomas J. Catalano

With cash-back rates getting as high as 8% nowadays, credit card rewards can give some serious rewards, especially if you buy a big-ticket item. That’s great for you as a consumer—but there’s also a lot of ambiguity for you as a taxpayer.

Unfortunately, the Internal Revenue Service (IRS) doesn’t say much about the treatment of credit card rewards. But in general, any income a taxpayer receives is subject to tax by the government. The type of rewards and how you receive them can be the main factor in determining whether they are taxable.

Sometimes, the rewards may be viewed as a rebate or discount, not as income. For example, a rewards program for using your credit card is treated as if it were actually a post-purchase rebate. However, some credit card reward programs offer large sign-up bonuses—which the IRS may count as taxable income.

Key Takeaways

• Whether or not credit card rewards are taxed as income depends on how the rewards are received.
• If you earn rewards without using the card, they’re viewed by the IRS as a rebate and not taxable income.
• Rewards provided as an incentive just for opening an account (without you spending any money) could be considered taxable income.
• Rewards earned on a business credit card may affect the amount you can deduct from those business expenses.

Types of Rewards That Are Not Taxed

The kind of reward you receive determines its taxable status.

Many credit card reward programs require you to make purchases to earn points. For example, points you earn through travel or airline miles, regular purchases, and cash back automatically applied as a balance credit are typically non-taxable.

Sign-up bonuses for getting a new credit card can go either way. To be considered taxable, the credit card company would have to give you the sign-up bonus in cash just for opening the account. Since you didn’t spend any of your own money to get the bonus, and it can’t be considered a refund, the IRS counts it as extra unearned income.

So, where do cash-back reward programs fit in? It varies. If a cash-back reward is credited directly to your credit card account, then the income is generally considered a nice rebate that comes with the benefit of using the card, so it’s not taxable.

Credit Card Rewards That Can Be Taxed

Concerns over your credit card rewards getting taxed will typically arise when cash is actually paid to you. You typically see this with sign-up bonuses and with some cash back programs. For instance, if you get a sign-up bonus just for opening the account (no purchases required), it can be taxed as extra unearned income. If you participate in a cash back program that sends you the money instead of giving you a statement credit, the IRS may technically count it as income.

Another key factor in credit card rewards being taxable is how much money you actually accrue in a year. If you earn $600 or more in rewards, you will receive a 1099-MISC from your credit card company. But even if you don’t receive the form because you earned less than $600 in value, you are still required to report the income and you may have to pay taxes on the appropriate amount (in the scenarios of sign-up bonuses and cash back programs, as explained above.)

1099-MISC and Credit Card Rewards

If you receive IRS Form 1099-MISC from a credit card company, the taxability question is answered for you. This IRS form for miscellaneous income is only issued (with copies to you and the IRS) when $600 of income comes from taxable income payouts. So, if you receive the 1099-MISC, you must report the payouts as income and pay tax.

In short, if you receive a 1099-MISC form in the mail as part of a rewards program, do not ignore it. Even if you believe your income should not qualify as taxable, you are better off talking to a tax expert. The IRS has become increasingly stringent on tracking income from these sources, and you do not want to subject yourself to a tax penalty because you failed to report your credit card rewards appropriately when a 1099-MISC was issued.

Real-World Example of Cash Rewards and Taxation

A real-life example of the potentially tricky, taxable nature of credit card rewards came to light in November 2021. The Wall Street Journal reported that the Justice and Treasury Departments were investigating American Express, due to a campaign that involved advising business owners to use AmEx’s fee-based wire service, deduct the costs as a business expense, and then treat the cash rewards accrued from the transaction on a personal credit card as tax-free.

The strategy, which ran from 2018 to 2020 and targeted small business owners and sole proprietors/professionals who shied away from accepting AmEx cards, ran like this: A company would use American Express’ wire service to pay vendors, suppliers, or even employees. It could then deduct the cost of using the service—fees of 1.77% to 3.5% per transaction—as a business expense on its tax return. Also, AmEx employees said the business owner could earn reward points for the wire transactions (similar to a credit card purchase), transfer the points to a personal AmEx Platinum Charles Schwab card—and convert them to actual cash at 1.25 cents per point.

It’s that last part that potentially gets problematic. In general, the IRS does not consider rewards points from personal purchases as income but as a discount—unless you actually receive them in the form of cash, as these small business owners were encouraged to do. The fact that two different entities are involved—a company made the points-accruing purchase, but then the reward points were cashed out by an individual—also muddies the waters, making the reward seem more like unearned income than a rebate.

American Express discontinued the practice in early 2020, hired lawyers to conduct its own investigation, and later took “actions to change products, policies, and personnel” after admitting that it had “failed to uphold… [its] values and had positioned certain products inappropriately, specifically with respect to tax benefits.” A few months later, in April 2022, it was reported that the IRS had launched its own probe into the matter.

The American Express story should remind you to tread carefully when playing with card-related fees and rewards for tax purposes. It could also prompt the IRS to introduce changes and finally provide more specific information about the taxation of credit card rewards.

Advisor Insight

Donald P. Gould
Gould Asset Management, Claremont, CA.

It depends on how the rewards are received. Most rewards are earned through the use of the card itself; for example, receiving one reward point for every dollar spent on a card. These rewards are considered rebates. However, rewards provided as an incentive for opening an account could be considered taxable income.

Do You Have to Claim Credit Card Rewards as Income?

The IRS doesn’t specifically address this topic, leaving it widely open to interpretation. Most tax experts agree that credit card rewards earned through credit cards are non-taxable rebates and that you should be fine as long as you spend money to get something. Based on this logic, you may need to declare something when there’s an actual exchange of cash, such as in the case of a sign-up bonus.

Do You Get a 1099 for Credit Card Rewards?

If you receive a 1099-MISC from the credit card company, then you may have to pay taxes. Don’t bury your head in the sand or jump to conclusions.  Get advice from a tax expert and take it from there.

Can You Pay Taxes With a Credit Card?

Yes, the IRS is happy for people to pay taxes with a credit card and has authorized three companies to process these payments. However, be aware that there are fees to pay for this service.

The Bottom Line

The IRS covers pretty much every money-making activity on its website. However, one notable exception it doesn’t specifically address is credit card rewards.

The government has published very little on the tax treatment of credit card rewards, making it difficult to know where it stands on this issue. Generally speaking, it can be interpreted that credit card rewards earned through the use of the card are rebates rather than taxable income. However, that line starts to blur once the rewards surpass $600 in a year or when a sign-up bonus is paid out in cash to open an account.

If in doubt, it’s better to ask. Speak to a tax expert if you are unsure or consider calling the IRS directly.

Correction—Jan. 30, 2023: A previous version of this article wrongly stated that credit cards rewards for less than $600 in value are not subject to taxes. Cardholders are still required to report their income and pay taxes on the appropriate amount regardless of whether the issuer provides a 1099-MISC form.

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