i wouldn't worry about this one a whole lot right now.. the tax currently payed is the transportation tax charged to those who provide miles in exchange for services, i.e. your long distance provider, car rental agency, etc.. and has little if anything to do with valuation for income purposes.. the existing tax has nothing whatsoever to do with the income tax..

implementing a tax on frequent flyer miles isn't real workable for a multitude of reasons.. already highlighted here is the basis/valuation aspect.. everyone rightly values their miles differently, especially with the recent continental and hilton bonuses providing for literally tens and even hundreds of thousand of bonus miles.. everyone redeems their miles for different things, ranging from upgrades to free trips to goods and services.. the fact that you wouldn't pay $8500 for that first class ticket to australia and yet barely have a second thought blowing 150,ooo miles to get there in first has little if anything to do with the valuation..

the accounting for the miles is another huge problem.. what if i decide to use my miles to obtain an airline ticket for my father or my brother?? the irs doesn't tax gifts.. (ok they do in some instances but not in most).. would they then start taxing me on award redemption that is a gift?? probably not.. would this then open up a huge loophole whereby people would trade awards?? probably..

the frequent flyer miles is sometimes viewed by the irs as a discount on the ticket price against future travel.. with all the bonuses that one could get on a single flight to japan or singapore now this would blow away their whole system of valuation.. i.e. without a discount for the ticket price paid, what is the basis for the miles?? it cost you something to get them, for which a deduction should be allowed..

what about all the miles currently out there?? a recent figure puts this at 3.5 trillion miles.. i'd love to see the irs try and form a basis for these miles.. without a basis they can't really tax the benefit..

when is an award redeemed?? if i transfer 20,ooo starwood points to 25,ooo airline miles have i redeemed an award and should i pay tax on it?? or do i pay tax on the 25,ooo miles when i redeem them for my coach ticket which could have a value of anywhere from $208 to $1800 depending on when i purchased it?? or should i only be responsible for 80% of the value of this ticket because 20% is unearned compensation and thus taxed differently than regular income..

can you imagine the uproar from the airlines, hotels, car rental companies, etc. whose marketing departments would have to come up with all sorts of new programs to keep one loyal?? although it would be nice as free upgrades would probably come back, albeit unconfirmed until the flight attendant comes back to you in seat 56F and invites you to come to the empty first class cabin on your flight lga-pbi.. or maybe the airlines will just take delta's example one step further and remove the first class cabin altogether and not have to worry about miles or upgrades or anything else that might allow them to retain loyalty and instead become a fast bus service..

sorry i rambled a bit.. btw: i'm not an attorney, nor do i have nearly enough knowledge of the ins and outs of the tax code for you to rely on anything i wrote here for much more than what a print out of it might be worth.. although your local congressman would probably love to hear any ideas on the topic you have..