Are Credit Card Sign Up Bonuses Taxable?

Credit card issuers frequently offer sign-up bonuses like cash back, points, or airline miles as an incentive for new customers. This has led many consumers to question the tax implications of receiving them. Understanding whether these rewards are subject to income tax requires a closer look at the specific terms under which they are awarded.

The Distinction Between Rebates and Income

The Internal Revenue Service (IRS) has not issued explicit, formal guidance on the tax treatment of credit card rewards, but its position is understood through established tax principles. The taxability of a sign-up bonus hinges on the distinction between a rebate and income. When a bonus is tied to a spending requirement, the IRS views it as a post-purchase rebate, which is not taxable, as it is considered a reduction in the price of goods or services purchased.

For example, a common offer is to receive $200 cash back after spending $3,000 within the first three months. In this scenario, the $200 is not treated as income but is seen as a discount on the $3,000 you spent. The same logic applies to bonuses awarded as points or airline miles; if you must meet a spending threshold to receive them, they are considered a non-taxable rebate on those purchases.

A different tax treatment applies when a bonus is awarded without an associated spending requirement. If a financial institution provides cash or points simply for opening an account, the reward is no longer a discount on a purchase. The IRS views this type of bonus as income, much like interest earned from a savings account, and it becomes subject to income tax.

Common Taxable Bonus Scenarios

Certain types of credit card bonuses are more likely to be classified as taxable income. The most direct example is a bonus given to a new cardholder upon account approval, with no requirement to make any purchases. Because the reward is not contingent on spending, it is treated as income.

Another scenario involves referral bonuses. When a current cardholder receives a bonus for referring a friend who subsequently opens an account, that bonus is considered taxable income to the person who made the referral. The reasoning is that the referrer has earned a fee for providing a marketing service to the credit card issuer, not a discount on their own spending.

These referral bonuses can be paid in cash, points, or miles, but their value is consistently treated as income. The card issuer will determine the cash value of any points or miles awarded for tax purposes. This treatment is distinct from the bonus the new, referred customer might receive, which would be analyzed separately based on whether it required spending.

Receiving and Reporting Taxable Income

If a credit card issuer pays an individual $600 or more in taxable rewards, such as referral bonuses, within a single calendar year, the issuer is required to report this payment to both the individual and the IRS. This reporting is done using Form 1099-MISC, Miscellaneous Information.

Receiving one of these forms is a clear indication that the issuer has reported the amount as income to the IRS. It serves as an official record of the payment that should be used when preparing your annual tax return.

The income reported on a Form 1099-MISC is entered on Schedule 1 of Form 1040, under the “Other Income” line. Even if the total taxable bonuses received from a single issuer are less than the $600 threshold and no 1099 form is issued, the legal obligation to report all income still rests with the taxpayer. All income must be reported on your tax return.