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Will you pay taxes if you cash out all your points?

April 30, 2020
6 min read
Midsection Of Businessman Using Mobile Phone And Calculator At Desk In Office
Will you pay taxes if you cash out all your points?
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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 ...

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[pullquote source="TPG READER TOMMY"]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. [/pullquote]

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.

Related: Complete guide to paying taxes on credit card rewards

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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:

  • Travel
  • 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.

Bottom line

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.

Thanks for the question, Tommy, and if you’re a TPG reader who’d like us to answer a question of your own, tweet us @thepointsguy, message us on Facebook or email us at

Editorial disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

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