As the leading white-label cashback rewards platform, we are often asked by our clients if their customers’ cash back rewards are taxable. In this post we’ll talk about how the IRS views cashback rewards from a tax standpoint, whether rewards from cashback credit cards or rewards programs are taxable, and how IRS 1099 forms are used. Finally, we'll explore how some prominent cash back rewards programs convey cash rewards tax considerations to end users.
IMPORTANT DISCLAIMER: We are not tax experts, and we do not provide legal advice or tax guidance, but below we can provide some general information. This blog post has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should always consult your own tax, legal and accounting advisors before engaging in any transaction or providing advice to your cashback rewards program members.
Are Cash Back Credit Cards’ Rewards Taxable?
According to TurboTax, from a taxation standpoint, credit card rewards often fall into one of two categories:
- Rewards treated as rebates on spending (Ex: cashback, statement credits)
- Rewards treated as income in exchange for performing a service which are taxable (Ex: refer-a-friend bonuses, bank account signup bonuses).
TurboTax also notes that the IRS does not consider rebates on spending to be taxable, as they are categorized as discounts, not income. So cash back from cash back credit cards are generally not considered taxable. This goes beyond just credit card cashback rewards to other types of rewards, too.
Are Cash Back Rewards Taxable?
To better understand how cash back rewards may be considered non-taxable, it’s helpful to think in terms of how traditional product rebates work:
If you buy a refrigerator from a department store, using any payment method, the merchant may offer you a mail-in rebate. By mailing in your rebate with proof-of-purchase, you would receive a partial refund on your purchase. This is basically a post-purchase discount on money spent which the merchant provides to the customer, and therefore, is non-taxable according to the IRS.
This is comparable to the way that affiliate programs offer rebates online, however, on a much larger, virtual scale which removes the “mail-in” process. It is worth noting, however, that cashback rewards, while similar to rebates, are not regulated by the same entities which address rebates, so while similar, their treatment may be different.
When shoppers utilize our clients’ cashback rewards extensions to shop, they will receive a cash back reward, funded by the merchant as a percentage of the sale amount, once a purchase is completed and after the settlement period.
In this way, for tax purposes, the cashback reward may be considered a rebate for money spent with a merchant. Typically, any reward you receive that requires a financial transaction is not taxable as income. Instead, the IRS views these as post-purchase discounts. They are not always cash-back programs - they can include travel mile bonuses and accumulated points toward future purchases.
Generally, when considering tax implications on cash back rewards for shopping, when you spend money to get something else, it’s tax-free.
The Purpose of IRS Form 1099s and How They Can Apply to Cashback Rewards
There are two forms which firms may send out to users on income that may be taxable: Form 1099-K and Form 1099-MISC.
Form 1099-K
HRBlock.com says, “IRS Form 1099-K reports payments and transactions from online platforms, apps or payment card processors.” And PayPal notes that “All US payment processors are required by the Internal Revenue Service (IRS) to provide information to the IRS about certain customers who receive payments for the sale of goods or services through their services.”
These payment processors do so by providing their users with 1099-Ks if transactions from their sale of goods or services exceed $600 annually. For example, as a payment processor, PayPal is required to send a 1099-K to any user who meets that threshold for payments received for goods and services transactions. PayPal notes this doesn’t include things like paying your family or friends back using PayPal for dinner, gifts, shared trips, etc.
Form 1099-MISC
According to Investopedia, “Form 1099-MISC: Miscellaneous Income (or Miscellaneous Information, as it’s now called) is an Internal Revenue Service (IRS) form used to report certain types of miscellaneous compensation, such as rents, prizes, and awards, healthcare payments, and payments to an attorney.”
You will receive a 1099-MISC if, for example, you sign up for a new bank account and earn a new-account-opening bonus. The bonus payment will be considered taxable income.
Similarly, some cash back platforms offer refer-a-friend/share-and-earn bonuses which are considered affiliate income and would therefore be subject to taxation.
In our research, we found that this leads many people to question whether their cash back earnings are taxable (aka, if it must be reported as income) to the IRS if they receive a 1099 from one of these companies.
Reading responses from tax experts in online forums where these questions are being asked, as well as consulting tax experts ourselves, the consensus is that it is up to the individual tax filer to determine how to appropriately enter the information on their 1099s when preparing taxes in order to correctly report income. Ultimately the individual filer is responsible for knowing what is and isn’t considered taxable income.
How Prominent Cash Back Programs and Banks Handle Taxes
According to our research and consultation with tax experts, cash back rewards programs don’t typically issue 1099s. These programs usually state in their terms of use that it is the consumer’s responsibility to understand their tax liability for these programs. In cases where programs indicate that a 1099 will be necessary for earnings over $600, they put the onus on the user to supply the requisite information or else forfeit their earnings.
Below are excerpts from some other major cash back rewards programs and banks for how they discuss cashback rewards taxes in their Terms and Conditions. Generally, they put the onus on the user, as we have discussed above.
- Cash Back: We offer the ability for Members to earn cash back (“Cash Back”) on their purchases completed through the Company Properties. Company [Rakuten] receives compensation for referring buyers to the retailers, brands, merchants and other partners participating in this Program (“Affiliate Stores”). Company gives a portion of this fee to its Members as Cash Back. Compensation received by Company may play a part in whether retailers and products appear on our site, where they are placed, and how we promote them to you. Participation in this Program and the opportunity to earn Cash Back are offered at the sole discretion of Company and subject to your compliance with this Agreement.
- Taxes. You may be taxed on your receipt of bonuses and other considerations (merchandise, travel, etc.) for member referrals or other promotional activities (such as prizes from a sweepstakes) depending on the tax laws of federal, state and local jurisdictions. You will be solely responsible for any and all tax liability arising out of the consideration received in connection with any member referrals or promotional activities.
Paypal Rewards Program Agreement:
- Earning Points. We may from time to time make our rewards points ("PayPal Rewards Points" or “Points”) available to you when you complete certain actions through the PayPal Service or the Honey Service. The most common way for you to earn Points is by making an eligible purchase from one of the participating third-party merchants while using the PayPal Rewards Program. Points are not available for all merchants or items. When Points are available for eligible purchases made from a particular merchant, we may indicate so on the PayPal Service, on the Honey Service, or within any other software we may make available for the Rewards Program (e.g., browser extensions or plug-ins). If a merchant is participating in the Rewards Program, you can earn Points based on the eligible items that you purchase from that third-party merchant. You must follow the links and instructions as disclosed within the PayPal Service or Honey Service or in other Rewards Program materials, to complete the eligible purchase and/or complete any other qualifying or required action(s) (e.g., by clicking the buttons labeled “Save Offer,” “Activate Offer,” “Activate Rewards,” or “Shop Now”).
- You understand that benefits you receive through the redemption of Points may qualify as taxable income under applicable law and you are solely responsible for any tax liability incurred in connection with your participation in the Rewards Program.
- Depending on applicable federal, state, and local tax laws, your distribution of Rewards may be subject to taxes. You will be solely responsible for any and all tax liability arising out of your distribution of Rewards and you agree to provide Ibotta with information Ibotta requests in connection with applicable federal, state, and local tax laws. You are solely responsible for any tax liability (including fees, penalties or fines) incurred by Ibotta as a result of your action or inaction in connection with the foregoing (including your failure to provide Ibotta with information). You agree that Ibotta is authorized to offset such tax liability from your Rewards.
Bank of America Cash Rewards Program Rules:
- Cash Rewards may constitute taxable income to you and you are responsible for any tax liability that may arise from receiving Cash Rewards. You may be issued an Internal Revenue Service Form 1099 (or other appropriate form) that reflects the value of Cash Rewards. Please consult your tax advisor, as neither We, nor Our affiliates, provide tax advice
Capital One Shopping Terms of Service:
- You are solely responsible for determining and paying the appropriate government taxes, fees, and service charges resulting from a transaction occurring through the services. We are not responsible for collecting, reporting, paying, or remitting to you any of those taxes, fees, or service charges, except as may otherwise be required by law. You acknowledge that, except to the extent required by applicable law, capital one shopping does not collect taxes for remittance to applicable taxing authorities in connection with purchased products. The tax recovery charges on purchased products are a recovery of the estimated sales taxes that capital one shopping is required pay to the applicable merchant for taxes due on the purchased product. Merchants invoice capital one shopping for certain charges, including tax amounts. Merchant sellers are responsible for remitting applicable taxes to the applicable taxing jurisdictions. Capital One Shopping does not act as a co-vendor with the applicable merchant for any particular purchased product. Taxability and the appropriate tax rate vary greatly by location. The actual tax amounts paid by capital one shopping to merchant sellers may vary from the tax recovery charge amounts, depending upon the rates, delivery location, taxability, etc. In effect at the time of the actual shipment of a purchased product to you.
How Should Your Company’s Cashback Rewards Program Handle Taxes?
We can only provide some information about taxes on cashback rewards; we cannot advise how you should handle reporting any cashback rewards earned to the IRS or whether taxes should be paid on cashback rewards by your cash back program members. You may consider the information above when planning your strategy for reporting on taxes for your company’s cashback programs, but be sure to consult with your own tax advisor, legal counsel, and financial experts - in short, always do your own due diligence. The above information should not be construed as advice.
