Originally Posted by
dayone
It's a $20K rebate, not "a $20K profit." It's not a taxable event. Similar to the early payment discount that a company might earn for a quick settlement of a purchase invoice.
A lot of the tax, accounting, bank and cash management advice being dispensed seems to be by people who stayed at a Holiday Inn Express last night.
I agree with your last statement, Dayone. Here is a quick summary that people can use to shoot holes in.
The reason that most of us believe that the miles/points earned by purchases on personal credit cards are nontaxable is the long-standing tax principle that a rebate on personal nondeductible purchases is not taxable.
If someone buys 20 loaves of bread for $1 each under a program in which he gets a $5 rebate check after spending $20 at the store, the $5 check is not taxable. The purchaser has not received an accession to wealth in comparison to a scenario in which the purchaser was simply charged $15 for the 20 loaves of bread. Credit card companies accept this principle and don't issue 1099s for the rewards they issue, even when the reward system involves a cash-back card instead of a points/miles card.
There is a fine line between this situation and the classic scenario in which someone receives a $100 bonus for opening a personal bank account. The IRS opinion is that the $100 is taxable interest income for the use of the depositor's cash. Bank's accept this IRS opinion and do issue 1099s for the account opening bonus.
Personally, I think the rebate scenaio applies and that no taxable income should be recognized on the points/miles or even cash-back rewards attributable to coin purchases. But there are NO absolute answers in taxation. The IRS might argue that the coins were not purchased for personal use and the rebate principle should not apply. The IRS might argue that the coins purchases were a financial transaction like the account opening bonus and any rewards should be taxable. I am skeptical that the IRS could win this argument, particularly since the motivation of many purchasers is to help the government reduce its overall currency issuance costs by helping to force banks to accept the $1 coins instead of $1 bills. We are kind of like the environmentalists.
Since there won't be any 1099s from the credit card companies this issue would only arise upon physical audit, which is unlikely. Another advantage of earning points/miles instead of cash rebates is that the auditor will have difficulty in valuing the points/miles earned via coin purchases.