Is Rakuten Cash Back Taxable? What You Need to Know
Understand the tax implications of Rakuten cash back, including when it becomes reportable and essential record-keeping practices.
Rakuten’s cash back program offers consumers a way to earn money on their purchases, raising questions about the tax implications of such earnings. As online shopping grows, understanding whether these rebates are taxable is essential for both casual shoppers and diligent taxpayers.
This article examines key aspects of Rakuten cash back, including its classification as a rebate or income, relevant reporting thresholds, circumstances when cash back must be reported, and record-keeping practices.
Rebate vs. Income
Understanding the distinction between a rebate and income is key when considering the tax implications of Rakuten’s cash back program. Rebates are typically seen as a return of part of the purchase price, reducing the cost basis of the purchased item. For example, a $100 item with a $10 rebate would have an adjusted cost basis of $90, which could impact calculations of capital gains or losses if the item is resold.
Income, in contrast, refers to any money received that increases wealth and is subject to taxation unless specifically exempted by law, such as wages, dividends, or interest. The distinction between rebates and income matters for cash back programs. Rebates lower the purchase price, but cash back rewards can complicate this distinction, especially if earned without a purchase or through promotions.
Although the IRS has not issued specific guidance on cash back programs like Rakuten’s, tax professionals generally agree that cash back earned through purchases is treated as a rebate. However, cash back earned through non-purchase activities, such as referral bonuses or signing incentives, may be considered taxable income. Evaluating the nature of the cash back received is crucial.
1099-K Threshold
The 1099-K form plays an important role in determining tax obligations for cash back programs like Rakuten’s. This form is issued by third-party payment processors to report certain transactions to the IRS. Beginning in 2024, the IRS requires these entities to issue a 1099-K if a user receives over $600 in payments for goods or services in a calendar year, a significant reduction from the previous threshold of 200 transactions and $20,000.
For Rakuten users, a 1099-K is relevant if cash back earnings exceed $600, particularly if the earnings are classified as taxable income, such as referral bonuses. In such cases, Rakuten or its payment processor may issue the form, requiring recipients to report the income on their tax return. Monitoring earnings and staying aware of this threshold is essential to avoid penalties from the IRS.
When Cash Back Is Reportable
Whether cash back is reportable depends on how it is earned. Cash back tied to purchases is generally not taxable, but earnings from promotional offers or incentives unrelated to purchases, such as referral bonuses or sign-up rewards, may be taxable. The IRS requires all income to be reported unless explicitly exempted by law.
For example, a Rakuten user who receives a $50 referral bonus for introducing a new customer must include this amount in their taxable income. This aligns with the IRS’s broad definition of taxable income and underscores the importance of understanding what qualifies as reportable earnings.
Record-Keeping Requirements
Effective record-keeping is vital for participants in cash back programs. Keeping detailed records of transactions, including receipts and documentation of cash back earned, supports accurate tax reporting and compliance. These records are especially important in the event of an IRS audit. The IRS advises taxpayers to maintain records that substantiate income, deductions, and credits for at least three years from the date a return is filed.
Digital tools and financial software can simplify record-keeping by automatically tracking purchases and cash back, generating reports that aid in tax preparation. Staying updated on changes to tax codes or reporting requirements is equally important, as these can affect how cash back is treated. Consulting a tax professional can also provide valuable guidance on maintaining proper records and staying compliant with IRS regulations.