Not according the IRS. Sort of.
Due to the difficulty of assigning a value to miles and the fact that most people get them for free, the IRS does not require you to report the value of any earned frequent flyer miles or other form of points on your tax return. Re-quoting from part of an LA Times article this morning:
[T]he IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.
However, the IRS has also started requiring increasing amounts of disclosure and reporting from businesses and banking firms. For example, brokerage firms working on indices trading now report cost-basis information on investments to the IRS so that it can confirm you are properly reporting your capital gains or losses. You’ll also get a 1099 for any significant interest income, like a bonus deposit for opening a new checking or savings account (I’ve opened several of these with Chase using my money but different people’s account info for an easy 6-12% APY). Personally I think the new capital gains reporting is great since it means I get a copy of that 1099, too. I love doing taxes, but the amount of information I used to have to gather to get it done right was a pain.
I’m not sure if this is a new requirement or not, but banks are also required to report income through “prizes or awards” valued at greater than $600 on a 1099-MISC. That makes sense if you have significant amounts of gambling income, but Citibank apparently has decided that frequent flyer miles also qualify. They’ve been sending 1099-MISC forms to people who opened American Airlines-affiliated checking accounts, and apparently they think each AA mile is worth 2.5 cents. If you received 25,000 miles, that works out to $625, just over the reporting requirement.
This is why I love churning your cards, Citi. Chase will retroactively increase your sign-up bonus if something better comes out in the next six months. When I asked Citi to do this for my ThankYou Preferred credit card, they politely but firmly declined. Sure, that’s their right, but it doesn’t motivate me to develop a long-term relationship. I’ve signed up for four Chase cards and plan to keep and pay the fees on three of them. I would probably keep my checking and savings accounts with them, too, if they didn’t make it so difficult to process transfers with other customers.
The easy solution here would be to value the points at 2 cents or less (1 cent, or even 0.5 cent is fair considering what they probably paid AA). That would keep them under the reporting requirement even for people who got 50K or 75K bonuses through credit card sign ups. Now, so far I’ve only read about people getting a 1099-MISC for checking account bonuses, but we can’t be sure that credit cards aren’t on their way.
Only the best award redemptions offer value at 2.5 cpm or greater. If a business class award to Europe costs $5,000 and you got it for 100,000 miles, that’s theoretically 5 cpm of value. But I would never pay $5,000 for a business class ticket in the first place. I would rather book a cheap revenue fare in coach for $750. So if we assume the business class seat is twice as good, I would value those miles at closer to 1.5-2 cpm
If anything like this happens to you, I strongly recommend you call Citibank and threaten to close your account if they don’t process and file an amended 1099-MISC with a value of $0.
Update: The Wall Street Journal recently published an article on this topic that is somewhat more authoritative than the LA Times’ in its Weekend Journal on February 4.