Are Credit Card Rewards Taxable? The Tax Court Weighs In
- Mar 5, 2021
On February 23, 2021, the U.S. Tax Court in Anikeev v. Commissioner T.C. Memo. 2021-23 partially upheld an IRS tax assessment on a taxpayer’s credit card rewards. Credit card reward programs have gained in popularity over the years. Cardholders make purchases with their credit card and receive a percentage in “rewards” in return based on the credit card company’s rewards program. Rewards come in a variety of forms including statement credits, cash back, airline miles and travel redemptions.
IRS policy has historically been that a purchase incentive such as credit card rewards are not treated as income but as a reduction of the purchase price of what is purchased with the rewards or points. In 2017, the IRS issued a notice of deficiency for tax years 2013 and 2014, asserting that the taxpayers had failed to properly include in income the $310,000 of rewards earned.
During tax years 2013 and 2014, the taxpayers at the center of the case had used their credit cards to purchase a total of approximately $6.4 million in Visa gift cards, reloadable debit cards and money orders. The taxpayers would primarily purchase Visa gift cards on their credit cards and then purchase money orders with the Visa gift cards. The money orders would then be deposited into the taxpayer’s bank account. The purchases had earned the taxpayers approximately $310,000 in credit card rewards.
- The Tax Court noted that had the taxpayers not been so successful at generating credit card rewards, the IRS likely would not have assessed additional tax.
- The Tax Court partially sided with the IRS in its argument that rewards from the use of credit cards to purchase money orders and re-loadable debit cards directly are includible in income, given that the money orders were eligible for deposit into the taxpayer’s bank account and reloadable debit cards are similar to cash.
- The Tax Court overruled the IRS’s position of taxing rewards earned on the purchase of gift cards, since they were not redeemable for cash and merely provide a service in the form of a plastic card.
The Tax Court commented on the case “The taxpayers clearly acquired economic benefits by cleverly and relentlessly manipulating the Rewards Program. However, the scale of his success in acquiring rewards makes this case an extreme test of the longstanding non-taxability of credit card reward programs.” The case offered unique insight into the taxability of credit card rewards, which appear to generally be safe from federal taxation, for now.
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Benjamin Aspir is a Partner and a member of the firm’s National Tax Group, with more than 10 years of public accounting experience. He has extensive experience with IRC Section 1202 - Qualified Small Business Stock and advising cannabis clients on IRC Section 280E, within the Manufacturing and Distribution practice.
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