Credit cards may provide rewards for the purchase of goods and services. The IRS has long held that the rewards are not taxable; they are viewed as a reduction in the price of the goods and services (Rev. Rul. 76-96). But when a rewards program is abused, it can result in taxable income.
A couple used over 99% of their American Express card’s 5% rewards under the “Blue Cash Rewards Program” to purchase Visa gift cards, as well as debit cards that they reloaded and money orders. They used the Visa gift cards, debit cards, and money orders to pay down their credit card debt so they could continue to make more purchases and obtain more rewards. In two years, they spent $6.4 million to generate $310,000 in these rewards. The Tax Court said these were circular transactions resulting in accessions to wealth, which makes the rewards in this case taxable income (Konstantin Anikeev, TC Memo 2021-23).
Note: A bank’s “Thank You Points” given to customers for maintaining their accounts were taxable when redeemed to buy airline tickets (Shankar, 143 TC 140 (2014)). The value of the airline tickets was akin to interest income. And the bank reported the redemptions on Form 1099-MISC based on the value of the tickets.