Taxing of frequent flier miles? Is it really true?

by Charlie Leocha on March 1, 2012

No taxes have yet been assessed on frequent flier miles. Citibank, in a misguided cover-your-aqq operation, decided to send 1099s to customers who received frequent flier miles for joining their credit card plans. It was misguided and the IRS has not made an official decision about taxes being assessed on FF miles, no matter how they were “earned.”

The Citibank mailings of 1099s for mileage awarded as bonuses for opening new credit card accounts generated an article from the LA Times that finally noted the IRS has not issued any ruling. Plus, Sen. Sherrod Brown (D., Ohio), chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection has started some congressional rumblings.

According to the Consumer Travel Alliance, this is not a valuation issue that the IRS wants to find itself in the middle of. FF miles are about as messy an accounting situation as can be conceived. The airlines aren’t interested at all in having the IRS look into their what they have created other than having them collect taxes on profits they make from the programs through mileage sales to the credit card companies and other businesses.

First of all, frequent flier miles are the property of the airlines. No matter how fliers gain their miles, airlines have the right to take them at any time. Passengers do not own their FF miles, they only have them in an account at the pleasure of the airlines. If the IRS made the miles have a value, airlines would have to value them as well and that would eliminate their control and create massive accounting hassles and whopping account payables.

Second — Frequent flier miles have widely divergent values based on what they are traded in for. Sometimes the value is less than 1¢ other times mileage might be worth 2¢ a point. Then again, the airlines can change the amount of mileage needed for flights that affects their value. The IRS could never pin a value on those miles. Plus, there is no value unless the mileage is used, which adds to the complexity.

Third — FF miles are just another form of discount on airline tickets or on the cost of a new credit card with a fee. Can you imagine if the IRS started taxing discounts on items sold? A home on sale for $250,000 that sold for $225,000 would generate a 1099 for $25,000 of income based on the bargain negotiated. Best Buy would have a hell of a time having any major sale if they had to provide 1099s for discounts provided to customers.

The list goes on. My assessment: Frequent flier miles will not face any tax issues in the near future, no matter what Citibank thinks with their ill-advised issuance of 1099s to their customers. Breathe easy.

If the IRS does pin a value on FF miles, passengers should be able to pay income taxes with them. Now, that would be a good use for the programs.

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Tagged as: Frequent Flier Miles, irs, Taxes

  • Chuck

    Citicard sure shot themselves in the foot on this one. I wonder how many people will order the card after this.

  • MeanMeosh

    I’m a tax guy, so I’ll try and shed a little light on the thought process here.  First of all, there is a major factual error in your story – the 1099s were sent to customers who opened BANK accounts, NOT credit card accounts.  That’s a big difference.  Citi’s argument is that awarding frequent flier miles for opening a bank account is no different than providing a cash bonus or a gift like a free toaster.  If you receive a $100 bonus or a gift of equivalent value, it is taxable to you like interest.  At least with a toaster, you can easily attach a retail value to it by heading down to Wal-Mart and seeing what it sells for.

    The problem with Citi’s argument is, as you correctly pointed out, the difficulty in assigning a value to FF points.  There is a long line of case law and rulings that say if you can’t currently assign a value to something, it isn’t taxable until a value becomes “fixed and determinable”.  Theoretically, maybe that happens when you actually use the FF miles.  But, I agree with you, that’s a slippery slope to go down.

  • Anonymous

     Please correct the article. The 1099′s have nothing at all to do with credit card accounts. I am not aware of anyone who has received such a 1099. They have been sent to people opening bank accounts with Citi for bonus miles. I agree with the arguments that if we cannot own the FF miles, it is very unfair to tax us on some purported value. In the case of Citi, it is valuing the miles at the price AA sells them directly to the public. But that’s a totally inflated price. Nobody buys at that price except to top off an award they want to redeem soon. The real value would be far below that.

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