the government would expect you to pay taxes on any income received for the miles--and yes, not declaring that income would actually be illegal, although it seems that the citizens of this country flout their tax laws with impunity, preferring to base their decision to pay on whether they will get caught for not paying, as oppsoed to the tax laws per se.

and yes, i believe that american has the right to cancel the free ticket you get for the miles, if they catch you selling it (and also to close your account and cancel your remaining miles), although, again, you might prefer to take the attitude that the chances of getting caught are low....