Will you pay taxes if you cash out all your points?
This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.
Reader Questions are answered twice a week by TPG Senior Points & Miles Contributor Ethan Steinberg.
With the ongoing coronavirus pandemic having canceled nonessential travel plans for the foreseeable future, many people are finding themselves with more points and miles than they could possibly use once things pick up again. Just because you aren’t traveling, doesn’t mean you can’t get a good return on your spending by using the right rewards credit cards. Many people, myself included, are considering cashing out some of their hard-earned points or switching to a cash-back card for the time being, especially to buffer against an economic recession. TPG reader Tommy wants to know if he’ll have to pay taxes if he cashes out his points …
Want more credit card news and advice? Sign up for the TPG daily newsletter
Because of the coronavirus and the fact that we have a baby on the way, I don’t see myself flying for a long time. I have 530,000 points with Chase that I’m thinking about cashing out. Do you think Chase will send me a 1099 form for the $5,300 in cash I’m getting? I earned most of these points from business spending on advertising.TPG READER TOMMY
Before I dive into this question, let me just remind you that I am not a tax professional and you should always consult one for advice if you have any questions. Like many issuers, Chase allows you to cash out your points at a rate of one cent each. We normally don’t recommend this option (in fact we rarely talk about it on this site) because that’s a much lower value than what you can get by transferring your Chase Ultimate Rewards points to travel partners like Hyatt, United, British Airways and more. However, these are certainly unusual times, and between not traveling for the foreseeable future and having a baby on the way, Tommy’s decision to cash out a hefty sum of points makes a lot of sense.
The IRS has not always been especially clear on when credit card rewards are taxable, leading to banks sending out 1099 forms to unsuspecting customers, but there is a general rule you can follow to tell whether you’ll need to pay taxes on the rewards you earned. If you earned points or cash back as a rebate for spending money then you don’t owe taxes. In all other cases, you do.
Let’s break this down and see what it actually means in practice. Since Tommy mentioned business spending, let’s say he has the Ink Business Preferred® Credit Card, which is currently offering a welcome bonus of 100,000 Ultimate Rewards points after spending $15,000 on purchases in the first three months of account opening. While we like to think of those 100,000 points as “bonus” for opening the new card, in reality they are contingent on your spending. If you don’t meet the minimum spending requirement in the allotted time period, you won’t earn the points. In the IRS’s eyes, that makes your welcome bonus a “rebate” on the spending you did to earn it, and therefore your points are not taxable.
The same thing applies to points you earn from spending on the card. The Ink Business Preferred earns 3x Ultimate Rewards points per dollar on your first $150,000 in combined spending each account anniversary in the following categories (then 1x), and 1x on all other purchases:
- Shipping purchases
- Internet, cable and phone services
- Advertising purchases made with social media sites and search engines
Whether you’re earning 3x in a bonus category or 1x on everyday spending, the points you earn here are contingent on you spending money, and are therefore considered a nontaxable rebate in the eyes of the IRS. This is true whether you transfer them to a travel partner, redeem them directly through the Chase portal, or cash them out like Tommy is doing.
So we see that most of the points you earn from using your card are nontaxable, but there’s one important exception to be aware of. One of my favorite ways to rack up additional points is by referring friends to a credit card. It’s a fair trade — I spend time explaining to them why to get and how to use a new card, and I get 10,000 to 20,000 points for my time. However, these are truly bonus points and not in any way a rebate on spending. In this case, you can expect to receive a 1099 from your card issuer at the end of the year. How they choose to value the points is another question entirely, but in the past we’ve usually seen reasonable tax valuations of one cent a piece or less.
If there was ever a time to cash out your hard-earned points, it would be when travel is suspended, the economy is tanking and you have a baby on the way. Tommy shouldn’t have to pay any taxes on this redemption, as long as his points were earned from a mix of welcome bonuses and credit card spending. If he earned any points by referring a friend he would owe taxes on those, but he’d pay that the year he earned the points, not the year he redeemed them, so there’s a chance he might’ve already paid any taxes he owes.
Featured photo by Natee Meepian/EyeEm/Getty Images.
Welcome to The Points Guy!
Earn 90,000 bonus miles and 10,000 Medallion® Qualification Miles (MQMs) after you spend $3,000 in purchases on your new card in the first three months of card membership. Offer ends 11/10/2021.
With Status Boost™, earn 10,000 Medallion Qualification Miles (MQMs) after you spend $25,000 in purchases on your Card in a calendar year, up to two times per year getting you closer to Medallion Status. Earn 3X Miles on Delta purchases and purchases made directly with hotels, 2X Miles at restaurants and at U.S. supermarkets and earn 1X Mile on all other eligible purchases. Terms Apply.
- Limited Time Offer: Earn 90,000 Bonus Miles and 10,000 Medallion® Qualification Miles (MQMs) after you spend $3,000 in purchases on your new Card in your first 3 months. Offer expires 11/10/2021.
- Earn up to 20,000 Medallion® Qualification Miles (MQMs) with Status Boost® per year. After you spend $25,000 in purchases on your Card in a calendar year, you can earn 10,000 MQMs two times per year, getting you closer to Medallion® Status. MQMs are used to determine Medallion® Status and are different than miles you earn toward flights.
- Earn 3X Miles on Delta purchases and purchases made directly with hotels.
- Earn 2X Miles at restaurants worldwide, including takeout and delivery and at U.S. supermarkets.
- Earn 1X Miles on all other eligible purchases.
- Receive a Domestic Main Cabin round-trip companion certificate each year upon renewal of your Card. *Payment of the government imposed taxes and fees of no more than $75 for roundtrip domestic flights (for itineraries with up to four flight segments) is required. Baggage charges and other restrictions apply. See terms and conditions for details.
- Enjoy your first checked bag free on Delta flights.
- Fee Credit for Global Entry or TSA Pre✓®.
- Enjoy an exclusive rate of $39 per person per visit to enter the Delta Sky Club® for you and up to two guests when traveling on a Delta flight.
- No Foreign Transaction Fees.
- $250 Annual Fee.
- Terms Apply.
- See Rates & Fees