Are credit card referral bonuses subject to taxes?


Credit card rewards are usually not taxable if you had to spend in order to earn them. That’s why referral bonuses might be subject to taxes. Here’s what you should know.

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Are rewards worth it if you have to pay taxes on them?

Credit card rewards are likely not to be subject of taxes if you spent money in order to earn them.

That means rewards earned from non-spending activities such as referral bonuses are taxable. But if you have to pay, say, $30 in taxes on a $200 referral bonus, it might still be worth it.

Expert Q&A

Check out all the answers from our credit card experts.

Dear Cashing In,

I just read that some credit card companies are sending out tax forms saying rewards are taxable. Is it still worth getting rewards if I have to pay taxes on them? – Liz

Dear Liz,

The question of the tax treatment of rewards programs seems to arise at the beginning of every year, when banks send out tax forms for the previous year.

Inevitably, the arrival of tax forms related to rewards bonuses prompts a lot of hand-wringing.

There’s already a sense among people who have pursued rewards for years that the golden age of earning and using miles and points is behind us, and the perception that rewards are now being taxed stokes that fear.

It is legitimate to ask if this hobby is worth it if accruing points and miles is going to be taxed: Earning “free” trips and cash back doesn’t really seem free if you are paying taxes on it.

See related:6 exceptions to paying tax on forgiven debt

Most rewards are still not taxable

But here is the good news: The vast majority of rewards activity is not subject to taxes.

For most people, earning points, receiving cash back, transferring points, spending points or miles on trips or merchandise or gift cards – almost all of this is still safely beyond the reach of the Internal Revenue Service.

Only a small subset of people with rewards accounts should worry about a portion of their rewards being taxable.

In the IRS’s only guidance on the subject, the agency said in 2002 that it “will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”

That’s a fairly narrow statement that would seem to apply only to airline miles, not bank reward programs, and to business travel, not to personal use of points and miles.

Rewards earned through spending

But banks and tax experts have generally interpreted it to protect from taxes all rewards that are given in exchange for some form of spending because the rewards are viewed as a rebate or discount or incentive – like a buy-one-get-one-free offer on shampoo at the grocery store.

A tax expert told me a few years ago that the IRS took that position because to do otherwise would create an administrative nightmare for banks and taxpayers.

The issue first arose in 2012, when Citi issued 1099 forms for “miscellaneous income” to customers who had received American Airlines frequent flyer miles for opening a Citi bank account.

Credit card referral bonuses not linked to spending

This year, there have been reports that Chase and American Express are sending out 1099 forms for credit card referral bonuses.

These are bonuses of points or miles awarded for referring friends to open credit card accounts, and banks have been expanding them in recent years as a way to attract new customers.

The important feature as it relates to taxation is that these referral bonuses are not linked to spending, so they do not count as tax-protected rebates or discounts.

American Express states in its terms and conditions for referral bonuses:

“The value of the Referral Bonus may be taxable income to you, and we may be required to send you a Form 1099-MISC and file it with the IRS. You are responsible for any federal or state taxes resulting from the Referral Bonus.”

Few people, however, probably read the terms and conditions – a 2016 poll found only 26 percent of cardholders “regularly” read their card’s agreements.

Rewards not subject to tax

Again, only a small subset of all rewards out there is subject to tax.

Items not subject to tax include sign-up bonuses, rewards earned through spending on a card, and rewards earned through flying or staying at a hotel – which account for the overwhelming majority of points and miles that people earn.

The other tax issue that often arises in relation to credit cards is when card issuers forgive debt, since forgiven debt is treated as taxable income – but that issue has nothing to do with taxes and miles.


Tip: Even though they might be subject to taxes, “refer-a-friend” credit card programs are an effective way to earn rewards. However, you need to know how to do it right to both earn the bonus and not to lose a friend in the process. Read “Etiquette guide for \u2018refer-a-friend’ credit card programs” to learn more.

Tax on referral bonuses: Are they worth it?

Even with the taxes on referral bonuses, you still come out ahead.

When I log on to American Express’ card referral program, I see an offer for 10,000 American Express points if I refer a friend.

  • If American Express values those at 1 cent per point, that’s $100 in taxable income to report to the IRS.
  • The amount you would owe in tax depends on your income, but it would probably be somewhere around $25 or $30, which is still less than the $200 or so the 10,000 American Express points are worth.
  • The bank also sends a copy of the tax form to the IRS, so ignoring it is unwise. Consult a tax professional if you have questions.

While the idea of taxing reward points sounds worrisome, rest assured that it applies only to a small number of people.

Even then, the value of the rewards far outweighs the amount of tax you would pay.

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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