Are credit card bonus miles taxable? No, says the IRS. Maybe says Citi.

Bonus miles from new credit card accounts, checking accounts, and savings accounts are a favorite way for banks to get you signed up for their products, and for you to earn free travel.

They’re not taxable according to the IRS, but David Lazarus, the Los Angeles Times’ personal finance writer reports some Citi checking account holders are getting a surprise IRS form in the mail…

Citi decided to report the value of American Airlines bonus miles for new checking accounts to the IRS as ‘prize / award’ income, valuing the miles at 2.5 cents a piece.

So, they sent IRS Form 1099s declaring the income to many customers for American Airlines bonus miles earned last year from opening checking accounts.

Why did they do this?

The IRS is pretty clear on the matter in a 2002 brief, noting “the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”

Well, Citi (*not the IRS to be clear*) interpreted the language on the Form 1099-MISC which says income must be reported if $600 or more in ‘prizes or awards’ are received.

And that’s where it may fall apart. The prizes and awards language may simply refer to awards within the context of a game or contest, not those earned as incentive for a financial transaction.

Since this was just sent to people who got checking account bonuses (and conveniently, not bonuses for Citi’s own Thank You program) this could be an isolated event caused by whatever middle level person responsible for checking account promotions in California. We haven’t seen signs of them sending these to people who signed up for national credit card bonus mile offers.

For now, the IRS says its 2002 brief stands, but won’t clarify whether you should pay taxes on the amount if you were sent a form 1099 by Citi. We’re looking forward to their formal stand on this.

In the meantime, we haven’t seen Chase send anything like this for its Continental Airlines checking account bonus offers.