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Paying Taxes On Credit Card Rewards

A reader emailed me wondering if credit card rewards are considered income and taxed by the IRS. My gut feeling was no, because you never get any sort of 1099 and I’ve gotten more than $600 in cashback before (if someone pays you over $600 in a year for work, they are required by law to report it via a 1099), but I wasn’t entirely sure so I hit the internets to try to find an answer.

What I discovered was that the overwhelming opinion on the web was that a cashback reward is much like a discount. It isn’t considered income and the cashback reward reduces the cost basis of the item you’re buying. If you were you buy a CD for $10, get 5% cashback, and then sell it for $15 then you owe taxes on the profit of $5.50. The cost of the CD is actually $9.50, which is 5% off the original 10% price, which makes the profit $5.50.

Another prime example are those promotional “rebates” on cars. If you get a $1000 rebate when you buy a car, it’s totally different than getting a $1000 commission check (commission is income, the rebate only reduces the cost basis). When you sell the car, you have to remember that your purchase price, in calculating taxes, has to reflect the $1000 rebate you received. Cashback isn’t much different from a rebate in the sense that you’re getting a discount, not a commission for using the card. It’s a fine fine line and the IRS hasn’t given much guidance on it.

Lastly, this also means that rebates, as in mail-in-rebates on products, are also considered discounts and not income. So, if you get a $300 item for free after rebate, the cost basis of the item is $0 and you received an income of $0. (if the rebate company screws you, well then the cost basis of the item is $300!) Until the IRS comes out definitively, most tax preparers are treating cashback as a discount.