Who does not love cash back? Getting a portion of your payment back whenever you buy something is great. But can cash back be taxed?

We have all heard the saying that there is no such thing as a free lunch. So how does this apply to cash back?

Well, for starters, a discount does not mean you get something for free. A discount means that you have actually paid for something, although not its original price.

Secondly, whenever you have some form of money advantage you have to remember somebody is watching it.

For instance, the Internal Revenue Service (our beloved IRS) is especially interested in your financial moves.

So a question definitely worth asking is whether credit card rewards, specifically cash back, are taxable. And if so, what you can do to avoid paying extra fees for non-compliance.

In this article we are going to dive into this issue and find out whether cash back or other forms of credit card rewards are taxable.

The short answer for this question is no. However, it helps to understand the ins and outs of this fact so that you avoid confusion and stay sharp about other kinds of rewards.

Typically the IRS views cash back rewards that you have earned on your spending as a form of discount or rebate, not as income.

Let’s say you have spent $2,000 using your cash back credit card which offers 2% cash back on your purchase.

This means you will earn $40 as cash back, but that does not mean you have earned it as income. Rather, you did not pay $40 out of those $2,000 of the original price.

Therefore, it does not make sense to consider those $40 as income, and that is why it is not taxable.

There are, however, some instances where it might be necessary for you to pay taxes on credit card cash back.

For example, if you get a sign up bonus that gives you some form of reward without you having to spend any money, the IRS might view the bonus as a form of income.

Some credit cards offer cardholders something that they call a “referral bonus”. You can get such bonuses by referring people to your current credit card issuer.

In cases like this, you may earn a cash reward which is not connected to a purchase, and therefore cannot be viewed as a discount.

For this reason, the IRS will likely consider it as a form of income, and might tax it.

As we have mentioned earlier, the IRS does not view the cash back you have earned through purchases as a form of income. For this reason, you do not need to worry about reporting it.

However, it is necessary for you to report all cash back you have earned in non-spending-related offers.

For example, when you make some money on cash back you have earned through some form of spending criteria, you might have to take a few tax measures.

For instance, the crest card issuer might send you a Form 1099-MISC: Miscellaneous Income.

This is especially true if the value of the cash back you have earned surpasses $600.

This form means that the cash back you have earned is considered income and you must report it in your tax returns.

However, not receiving the form does not imply that you do not need to report your cash back.

Remember that the IRS will view as income any non-spending-linked cash back you earn.

So even if you do not receive the form from the issuer, and even if the amount of cash back is below $600, you still need to report it.

Business credit cards sometimes offer heftier cash back rewards, which might raise a few flags as to whether one should be paying taxes on these returns.

However, as far as taxation goes, the IRS views business cash back in much the same way as that of regular, non-business credit cards; if you have earned it through purchases, it does not count as income.

Just like with non-business credit cards, if you earn any money that is not linked to spending, the IRS can view it as income, and therefore you will have to pay a tax.

Keep in mind, however, that when you earn cash back through business-related purchases, you must subtract that amount from the purchase amount when you file your taxes.

Let’s say, for example, that you have bought a business flight ticket for $600 and earned $30 as cash back.

When you report this purchase, you will not report the full $600, but rather, the $570 you have actually paid for the flight.

Taxwise, the points and miles you earn on your credit card work pretty much the same as cash back rewards.

If you have earned them through spending, the IRS will consider them as a discount, not as income.

When you earn points or miles by spending a minimum predetermined amount within a set period of time, they are also not considered income. Therefore they are not taxable.

For example, a card might offer 75,000 bonus miles after you have spent at least $3,000 on purchases within the first three months since opening the account.

This is a fairly common offer, especially in higher tier cards. Because the 75,000 bonus miles have been earned through spending, they do not count as income, and therefore are non-taxable.

The only instance when points and miles will count as income, is if you receive them without having to spend any sum of money. 

It is fairly common for people not to know when cash back and other kinds of credit card rewards are taxable.

Now that you are familiar with it, keep an eye open for taxable cash back and never let the IRS catch you off guard.

And if you’d like to take advantage of cash back credit cards in your life, read the following content we’ve made to show you the best rewards cards available in the market.