Are Cash Back Credit Card Rewards Taxable?

Don’t worry; your credit card cash-back rewards from regular purchases are not taxable. They are considered rebates in the tax code, except when earned for purchases of cash equivalents like money orders or debit card reloads.

Thomas M. Spade, a Senior Instructor of Accounting at the College of Charleston explains, "Redeeming rewards against a credit card balance isn’t taxable; it is generally treated as a rebate. And a rebate is generally treated as non-taxable for individual taxpayers in accordance with Revenue Rulings 76–96."

Cash back and credit card rewards are treated as rebates or discounts rather than earned income. Since no income is earned, only a reduction in purchase cost, credit card rewards aren’t taxed. This applies to points, miles and cash back that you receive from using your credit card for purchases. However, as demonstrated in the court case, there are exceptions.

Almost every credit card welcome offer has a spending requirement. For example, the Capital One Quicksilver Rewards Credit Card offers a $200 bonus after $500 of spending within three months of opening an account. Since the terms require a prior spend of $500, the welcome offer is technically a rebate, which is not taxable.

However, bonuses received without a spending requirement — like those for signing up or referring someone — are likely taxable as income. “Credit card rewards are taxable only if the cardholder obtains them without spending any money,” says Dr. Katie Landgraf, Assistant Professor in Accounting at the University of Hawaii-West Oahu.

If you receive cash back or direct cash bonuses without any spending criteria, the IRS may consider this taxable income.

For rewards exceeding $600, your card provider might issue you a Form 1099-MISC or 1099-INT. You'll need to report these amounts on your tax return. This is very rare but could theoretically happen if, for example, you successfully sign up everyone at your family reunion to a program with a referral bonus and earn a big bonus.

Another factor to consider is how you earn the rewards and cash back. As demonstrated in Anikeev v. Commissioner, using credit cards for cash-related transactions, such as buying money orders or loading cash onto debit cards, doesn't involve buying products or services. Consequently, rewards from these transactions are considered earnings, not rebates, and are treated differently for tax purposes.

Cash back rewards for business are also considered rebates and should be accounted for in your expenses, reducing the cost of purchases. The downside is that you may have more taxable income when you redeem cash back, since your expenses will be lower.

If you've earned cash back through any business expense, you need to book redemptions as a rebate on the purchase amount when filing your taxes. Let’s say you paid $600 for a business flight and earned $30 cash back, which you later redeemed. You’d need to report the cash back as a rebate against your expenses. Similarly, if you redeem rewards to make a purchase in full, you would not deduct that purchase expense from your income.