dhuey

I'm not so sure about that. Maybe there is some case law or a reg. on this point. It just seems to me that the fact you get these personal miles from business travel and didn't pay for them does not automatically mean the basis is zero.

popot53

Thank you for answering. Basically I used tons of miles (earned from credit card bonuses) to book tickets for "friends and family" and in return they paid me cash. They are not going to issue me a 1099. In the event of a rare audit, how do I explain all that cash sitting in my account?

Andy2

Fortunately, that level of audit on an individual tax return is pretty rare, in my opinion.

Many taxpayers would argue that the receipt of cash is a nontaxable gift. Sure you bought your friends and family flights using your abundance of miles since they love to travel. Perhaps you travel a lot on business and the last thing you want to do is get on a plane for vacation. The company encouraged you to sign up for that new United Explorer card with all of those bonus miles since they thought you would work harder on your business trips if you had those free lounge passes. So you gave away the bonus miles.

You didn't want anything in return for those miles you spent on the friends and family. They know you are always short on cash so they sometimes give you some cash gifts. It would be an even better argument if the receipt of the cash was detached from the the time you provided them with the flights, especially if your receipt of cash was around the holiday season or your birthday.

It hardly seems as if you would be penalized very heavily in the unlikely event that it got discovered on audit. In you earlier post you said you asked five accountants and they all said it was nontaxable!

popot53

LOL...Andy that is a great way to put it! I'll remember how insanely thoughtful I was, in an unfortunate event. I just wanted to see what the smart Fters thought...again thank you!

Xyzzy

If what yu received were gifts you should be fine. As long as each of them gave you less than $13k you have nothing to declare. The IRS rules on gifts are available here.

EsquireFlyer

FYI, while you can say what Andy said, the IRS does not have to accept your characterization of the transaction as a gift if they believe that in substance it was a sale. And they can still come after you for taxes and/or penalties. (But you might have a better chance withstanding an IRS challenge if you characterized the payments as gifts, rather than simply admitting that it was a sale you didn't pay taxes on.)

Also, as long as the miles were earned from credit cards (under the "rebate" theory), it seems to me that the income from selling the tickets would most likely not be taxable, unless you sold the ticket for more than the miles were worth. (Which is an odd proposition because how can the miles be worth less than the ticket you exchanged them for? Unless, of course, you sold the ticket for more than the cash price of a comparable ticket.)

For example, if my credit card paid me a 1% cashback rebate on a $5000 purchase, and I used that $50 rebate to buy a baseball ticket (to bracket the issue of non-transferrability of airline tickets for the moment), and sold the baseball ticket to someone else for $50, I don't think I would have any taxable income on the sale. On the other hand, if I resold the ticket for $90, then I would have $40 of taxabale income.

With a plane ticket, I would hypothesize that your basis in the ticket is the FMV of the miles that you redeemed to obtain the ticket, so a sale of the ticket would only be taxable to the extent that the sale price exceeded your basis (although I really can't say whether the IRS would agree with me on this or not).

Andy2

Take me through this and tell me what I am misunderstanding. I get 100,000 British Airways miles for signing up for the card and I get 10,000 more miles for spending $10,000 on stuff that I don't deduct for tax purposes. That is a typical fact scenario that many of us face.

Let's say I value the miles at 0.4 cents per mile, so I need to use the rebate rule to reduce the basis in my stuff from $10,000 to $9,600 (110,000 miles times 0.004). No tax consequence to reducing the basis in my stuff unless I sell it for more than $9,600, or take a tax deduction for the stuff.

I find someone with whom I have no donative intent relationship, so let's ignore the gifting scenario that might be relevant to PoPot. That someone really wants to go to Europe so I book him on a flight using the 110,000 miles and he hands me $1,000 of cash. How do I have any basis in those miles?

EsquireFlyer

I find this part confusing myself, and I am not sure it is correct. But I reach this conclusion by analogizing to cash rebate (which is the more common form of a rebate).

I don't think the key is whether you have a basis in the miles, but whether you have a basis in the ticket that you "bought" with the miles and then resold.

For example, if you received the $50 cash rebate from your credit card (1% cashback on $5,000), and you used that $50 cash to buy a share of stock, which you sold a month later for $90, you would assume that you had a $50 basis in the stock (even though that $50 came from a credit card rebate), and that you would only be taxed on the $40 increase in the stock price, right? Or would you assume that the entire $90 stock sale was taxable? (I believe that the stock broker would only report the $40 capital gain to the IRS, as the broker doesn't know or care where your initial $50 came from.)

So in the miles-for-ticket scenario, I view the miles as taking the place of the cash that you used to buy the stock.

Andy2

I think you are correct, but it could have unintended consequences. In my example, I could view it as the FMV of the 110,000 miles always being $1,000 to achieve comparability to the cash rebate, since the basis of $1 of cash is perhaps always $1. So I am really holding two things in my transaction, 110,000 miles with a FMV and basis of $1,000 and the stuff I bought for $10,000 that I have a basis of $9,000 in.

When I sell my miles for $1,000 I have no taxable income. By arguing that the FMV of the miles that I received was high, I avoid gain on the sale. If I am very sure there are no tax consequences to using the stuff I bought for $10,000 (that has a basis of $9,000), I am in great shape for tax purposes.

But if I bought a bunch of stuff that I put on my expense report at work, I am screwed by using this high FMV per mile. If my employer reimburses me $5,000 because half of the stuff I bought was for work, I would pick up $500 of taxable income. If I fly myself using the 110,000 miles, I could care less what the basis of those miles is, since there is no tax effect. Also, it is hard for me to argue that the AA miles from Citi banking are worth 0.4 cents per mile if I argued that my BA miles were worth 0.9 cents per mile.

Most of us would be better off always arguing a very low FMV per mile under the rebate rule. It will reduce the taxable income to be picked up on reimbursements for buying work stuff on a credit card that provides miles for the "employee" that is reimbursed. It provides less taxable income for someone who buys items like Charter One gift cards that might generate taxable income if redeemed with a FMV greater than basis (after the application of the rebate rule). The disadvantage occurs when those "low-basis" miles are sold, which is the exception to the rule.

As usual, thanks for your example. I hadn't thought of applying a basis to the miles received under the rebate rule.

Ritz

They can, but I have it on good authority that they won't. Speaking to 2 different reps that I/my company has dealt with very well over the last few years, I was told that reps are aware of this "Citibank" issue this year, and "unless the amount is so egregious as to possibly push one's earning into another tax bracket", they "wouldn't give it a second thought."

EsquireFlyer

That's not what I was talking about...I was writing about another poster's suggestion to characterize the sale of miles as a "gift" followed by a coincidentally timed "gift" of cash.

If the IRS did not challenge what it considered to be mischaracterizations of the nature of a transaction, no one would have to pay income tax.

("I didn't earn any wages this year. I volunteered at Chase Bank. And the General Manager happened to give me a gift of $12,000 because he had extra money lying around. The Assistant Manager also gave me a gift of $12,000, and the Vice President gave me a gift of $12,000... but I didn't have any wages.")

BStrauss3

That may be the least of your problems - you've publically admitted to violating the Terms and Conditions of the FF programs. If they want to bother to figure out who you are, they'll zero and close your accounts...

popot53

there is no where in the tax code that states how much a "credit card bonus earned mile" is worth. So a 100,000 miles can be worth $20,000 to me. If I gave them to a friend and he gave me a $1000, essentially I lost $19,000. They can hunt all they want, I have no miles left.

EsquireFlyer

The fact that the FMV of an airline mile is not specifically defined in the Tax Code does not mean that you can arbitrarily make up whatever FMV you want.

The Tax Code also does not specify the FMV of diamonds and gold coins (or any number of other things), but I can't have my employer pay me in diamonds and gold coins, but pay no income tax, because personally I value the diamonds and gold coins at only $1 each (even though I can sell them for more), placing my income below the lowest tax bracket.

popot53

Very true. Since each gift was under $13,000 I guess thats the best route to take.