There is a very common misconception in the US, that if I you do not receive a 1099 you do not need to report income on your Income Tax Filing. As such you find many people avoid a deal that comes with a 1099 so that they can fly under the radar.
I have some bad news for you; the IRS demands that you report all income, not just income in excess of $600 when you file taxes. The 1099 is just a notification from the issuing company that they have claimed you as a deduction for their business expenses for that year. Therefore deliberately targeting offers that do not issue a 1099, such as bank sign up bonuses, giveaways, prizes in order to attempt to avoid the reporting is actually fraudulent, and under the rules of the IRS there is no statute of limitations for Fraud.
Luckily, at this time Miles and Points are not required to be reported to the IRS, with the exception that if the acquisition of said miles came with a 1099 – the most famous example of this would be Citibank issuing 1099s for Checking Account Miles Promos. By issuing the 1099 they claim your miles as a cost of business to reduce their own basis for Tax reporting, and pass on the payment to you, the customer.
The IRS goes so far as to expect tax on bartered goods or services, such as if you have a plumber who fixes a problem at a carpenters house, and the carpenter then makes him a table – both the cost of services from the plumber must be reported as income on the carpenters tax report, and likewise the plumber must include the fair market value of the table on his report.
Such omissions are unlikely to be identified by the IRS until you are subject to an audit, and it is worth noting that Itemized Filers, rather than those who claim the standard deduction, are more likely to be audited. But, just because you are only likely to get in trouble because you get caught, doesn’t make it ok, and the IRS is no joke, remember they brought down Al Capone on Tax Evasion!
So what happened to all those people that earned millions of miles buying coins? Effectively they purchased cash with cash and got a cashback in the process…..right under the government’s nose.
They did not earn anything, they received a reward for loyalty… for whatever reason (and lets not look a gift horse in the mouth!) points and miles are not considered income by the IRS.
The only exception, as was cited above is when a bank like Citi assigns a basis to the miles and then issues the 1099, but they did that in order to reduce their total cost of ownership of the giveaway, not because it was demanded by the IRS.
That’s what I’ve read as well. I ask because generating 300k TY points a month and cashing them out looks a lot like income 🙂 but technically isn’t.
Yep, you are pretty much on the poverty line right there…
I could probably live off of that but it’s by far not the only income, so i was concerned about getting taxed at over 25% on those.
Yep, it would be a decent lifestyle indeed. I think for now you are good, so lets make hay while the sun shines 🙂
On a related note: the Madoff trial shows that you if you use your employer’s business card for personal expenses, you have to declare that as income:
http://www.bloomberg.com/news/2013-10-21/madoff-offices-not-secured-for-five-days-fbi-agent-says.html
Uh Oh, as a self employed person that is a tricky one!
As a tax professional, I appreciate this article. You have no idea how many times I’ve had to pry to get income information from clients. It’s crazy, and most people don’t mind being a criminal if it means saving a few bucks on their taxes.
Although, I love working in the grey areas and helping people NOT pay more than they need to 🙂
One thing I’ve wondered about MS- so miles and points are seen as rebates and as such are not taxable. Ok. But you take a gift card as rebate for some points, then sell your gift card for cash from a gift card site. Could it be argued it should be a profit on $0 cost base so 100% profit? I would hope not. It should be as if you took your own money and bought a gift card that you sold at a loss. I just wonder about this. If thousands a year (haha, ideally!) are being transferred or deposited into your bank account and the IRS wants to know the source, I have wondered if that would be an issue.
Well… I’m no tax professional, and this sort of question would be argued in court anyway, but it is something to think about, We could hope it was considered a capital transaction and swapping one thing for another, but certain things do seen to be in grey areas.