Many people are asking themselves this question after thousands of Citibank customers were issued 1099-MISC forms to report the value of frequent flyer miles they were given as a bonus for signing up for new credit card accounts. Two Citibank customers have filed class-action lawsuits to fight the situation. The lawsuit asserts that not only were customers not told that the miles would be reported as income, it holds that the miles aren’t taxable anyway.
The law is unclear on whether frequent flyer miles are indeed taxable. The only regulations the tax code puts forth is on company benefits, which frequent flyer benefits could be considered to fall under.
However, Announcement 2002-18 states that:
“There are numerous technical and administrative issues relating to these benefits on which no official guidance has been provided, including issues relating to the timing and valuation of income inclusions and the basis for identifying personal use benefits attributable to business (or official) expenditures versus those attributable to personal expenditures. Because of these unresolved issues, the IRS has not pursued a tax enforcement program with respect to promotional benefits such as frequent flyer miles.
“Consistent with prior practice, the IRS 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. Any future guidance on the taxability of these benefits will be applied prospectively.”
In essence, the IRS has said that they do not plan to enforce taxation on frequent flyer miles obtained through business travel. However, they’ve left miles obtained as an award for signing up for new accounts, and the law itself, unclear.
As situations like the Citibank action occur, the law may be clarified. But for now, it remains vague.