Wall Street Journal Article on the Taxability of Airline Miles

[bem684]

Just in case some of you aren't getting free subscriptions to the WSJ for some odd reason...

http://online.wsj.com/article/SB10001424052970204662204577199323818720712.html

[Yeki89]

Very clear

[bem684]

For some reason I didn't notice this the first time I read the article...

"Miles awarded as prizes. Mr. Petersen notes that sometimes firms award miles to a few customers chosen at random, as in a sweepstakes. These qualify as "prizes," which are generally taxable, just as lottery winnings would be. He has seen cases in which winners rejected the miles because they didn't want to owe the tax involved."

That's the dumbest thing ever.  It's almost as bad as saying "I'd rather not take the $10,000 cash prize, because then I'd have to pay $3,000 taxes on it!"  Miles are so easily sellable or convertible to other sellable assets, that the person would definitely profit from the prize even after paying the taxes.

[AsherO]

For some reason I didn't notice this the first time I read the article...

"Miles awarded as prizes. Mr. Petersen notes that sometimes firms award miles to a few customers chosen at random, as in a sweepstakes. These qualify as "prizes," which are generally taxable, just as lottery winnings would be. He has seen cases in which winners rejected the miles because they didn't want to owe the tax involved."

That's the dumbest thing ever.  It's almost as bad as saying "I'd rather not take the $10,000 cash prize, because then I'd have to pay $3,000 taxes on it!"  Miles are so easily sellable or convertible to other sellable assets, that the person would definitely profit from the prize even after paying the taxes.

I don't think so. If Delta gave me a million SkyMiles at 3cpm valuation, and they're only worth 1.1 cpm to me, then if my tax rate is 40%, I'm better off rejecting their offer. The other think to consider is that (AFAIK) these gifts bump up your gross income, so if you have some reason to want to keep them under a certain amount, you have to consider that as well.

[bem684]

I don't think so. If Delta gave me a million SkyMiles at 3cpm valuation, and they're only worth 1.1 cpm to me, then if my tax rate is 40%, I'm better off rejecting their offer. The other think to consider is that (AFAIK) these gifts bump up your gross income, so if you have some reason to want to keep them under a certain amount, you have to consider that as well.

I hear.  However if you can prove that there is no way the miles are worth 3cpm you could have them re-valued in tax court...of course the prize would have to be pretty mighty to make it worth the legal fees lol.  It's sort of ridiculous that the banks get to assign a value to the miles. 

I wonder if you win a car, are you taxed on the MSRP, sticker price, or the average of what people actually pay for it?  According to my tax professor it ought to be taxed on the fair market value (ie what people are willing to pay), but I can see how that would be a headache for the IRS and they might just circumvent their own rule.

[AsherO]

I hear.  However if you can prove that there is no way the miles are worth 3cpm you could have them re-valued in tax court...of course the prize would have to be pretty mighty to make it worth the legal fees lol.  It's sort of ridiculous that the banks get to assign a value to the miles. 

I wonder if you win a car, are you taxed on the MSRP, sticker price, or the average of what people actually pay for it?  According to my tax professor it ought to be taxed on the fair market value (ie what people are willing to pay), but I can see how that would be a headache for the IRS and they might just circumvent their own rule.

There are other ways to contest it, the question is if it's worth the hassle, for 1mm DL it might be, but for 50k I'll pass. Either way, point was that it isn't a foolish argument.

[michael]

You also have to factor in the potentially high cost for a tax attorney, if you raise enough red flags to trigger an audit.

[michael]

It seems that miles earned through spending money on credit cards are not taxable, because they are considered a reduction in purchase price. This means that if you spent $1000 and got $500 worth of sign-up bonuses, it just reduces your basis in the goods you purchased, in the form of a rebate.

However, no one on these forums, nor anyone else I was able to find online, addresses the issue of getting a bonus worth $500 when you only spend $1, like by the United/Continental/Starwood cards. As you only spent $1, and got much more than that in return, there is no basis to reduce.

Are these miles taxed? Any opinions?

[bem684]

In theory they should be.  Anything beyond the rebate would probably be an incentive/prize which is taxable.  In practice those bonuses are not generally reported to the IRS, and therefore you can get away with it.

[newtothegame]

even in those cases, like amex said in the article " "Often there is either a spending requirement to get the miles, or the customer is paying an annual fee to sign up for the card," she said."

OnePass card has an annual fee

[bem684]

OnePass card has an annual fee

I believe the fee on that card is $85.  The signup bonus is worth $500 at least.  So you still have a problem.  I don't think they'll allow a purchase rebate on something several years in the future, and there's a definite possibility of canceling the card, so you couldn't rely on the assumption that the customer will pay that annual fee for many years. 

[michael]

So why do absolutely none of the numerous articles online about this general topic, discuss this particular issue?

This can be a huge problem if the IRS audits any one of us.

[Dan]

Because its not an issue.

[AsherO]

So why do absolutely none of the numerous articles online about this general topic, discuss this particular issue?

This can be a huge problem if the IRS audits any one of us.

It would only be a problem if you get audited. The airlines/CC issuers aren't reporting reporting to the IRS that they gave you miles (valued at $xxxx), and the IRS doesn't ask to see people's mileage accounts when they audit. The only issue is with someone who is selling their miles, that person needs to talk to his accountant about how to calculate taxes on that income.

[michael]

Ok, so I'm specifically referring to people who sell their miles. Maybe most articles don't address that issue, as most people don't sell them.

If you sell them though, AND you're audited AND the check you received clearly states some sort of mileage buyer AND from was deposited in your bank account, you have issues.

[Side incomer]

as most people don't sell them.

Not sure about this.

[AsherO]

Ok, so I'm specifically referring to people who sell their miles. Maybe most articles don't address that issue, as most people don't sell them.

[/b]

Sounds right to me.

Not sure about this.

I'm sure about it. If it was common you'd see it (and the airlines' reactions) discussed more in the media.

[Drago]

S/o asked in the Fidelity thread what this would mean for that offer. What are your thoughts?
When I did it for TD Ameritrade 2 years back, I never received a/t, but since there is no spending req or annual fee, it would seem that it should be taxable.