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I've been referring people to a grocery delivery service, I receive credits every time I get a referral. I've been earning over $3000 in credits a month that I spend on groceries and other things. Now I'm not an affiliate and I don't get a W-2 or anything like that. I'm not sure if I should be paying income tax on the credits because they can't be converted to cash, they're purely store credit. The credits also expire after 90 days.

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There are a few layers of the issue at hand -

When I help a friend move, and I see a $100 restaurant gift card in my mailbox a few days later, I'm not inclined to claim it as income. If I started tutoring neighbor kids in math, and accumulated 'credits' at $75/hr to be returned to me in equivalent work, or gifts in kind, I've crossed into a bartering situation which really requires disclosure on one's taxes. And we try to avoid the implication that certain things are less likely to be caught by IRS than others, as that's a slippery slope. This leads to an attempt to pay the tax due.

If the value received were strictly a level that could easily be used in time, for me, about $200/wk, I'd say that you should just track that spending and declare it at full value. The issue is that you've cleverly turned the excess into a nice business.

The simplest way to handle that would be to claim that income as received. In other words, $1000 worth of goods purchased is claimed at the time you sell it, and only the money received need be claimed. A CPA might tell you that you claim the full amount based on the time you spend it, and then any items sold for less than your cost actually offer you a loss. If/when the rewards end, you'd have a potential time where you are selling off inventory with no way to claim these losses. I'd avoid that. I'm 80% sure I'm actually wrong here, but in an audit, the agent has leeway, and you'd actually impress her with how much effort you put into paying tax on this whole affair. The risk is a small tax due for improper method.

(I'd love to hear what a pro advises you. please update us via edit to your question)

  • So when I buy something for resale, I claim only that income? Anything that I spend on groceries I don't claim? If I do that, what's my cost basis for the electronics I resell? I submit the receipts for the items received showing my cost basis is $0, am I not extremely likely to be audited? – JJ890 Mar 5 at 19:38
  • Sorry if I was not clear. All money spent on things for you, any normal grocery items., Is claimed as income. The rest is claimed as you get cash for the items that you sell. I admit this accounting may not be perfect, but it seems to me they keeping track of inventory and profit and loss on those items is a large burden. – JoeTaxpayer Mar 5 at 19:56
  • Sorry if I'm still getting this wrong, but you think I should claim the credits as income, and the cash received from reselling as income? Wouldn't I be paying significantly more in taxes? Also, everything I sell is technically at a loss, as I pay full price + sales tax then resell, so I only get around 75% after. – JJ890 Mar 5 at 20:04
  • Understood. So, you'd claim say $1000 as income, and after a $750 sale, need to account for a $250 loss? That seems more cumbersome than just claiming as I proposed, although likely, the legal way to do it... – JoeTaxpayer Mar 5 at 20:18
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It is income - defined as an exchange of value, not as an exchange of cash.

3000 a month is 36k a year. That is not insignificant, so it VERY Likely is above a limit that applies for 99.99% of the people that just get some credit occasionally.

  • Should I request a form 1099-misc? – JJ890 Mar 2 at 8:19
  • Legally, they are required to send you a 1099. If they don't and won't, carefully track the rewards, and keep it for your tax folder. – JoeTaxpayer Mar 2 at 11:56
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    @JoeTaxpayer Is store credit that is not transferable and has an expiration date really taxed the same as cash? Is that something a 1099 is usually issued for? – Ben Miller Mar 2 at 12:17
  • @BenMiller - There is precedent for things like game show prizes. People selling the $2000 worth of furniture for $400, and then needing to argue a $500 tax bill. The IRS was inconsistent in their response across the country. In this case, OP would have the issue of unused rewards. But, I'd suggest that the ones he did spend are clearly valued at face value. The rest? Did he sell for 10% discount? Lose completely? Buy non-perishables, and sell those? We need more detail. Rule of thumb, $10/day/person. Family of 4 might buy $1000 or so per month. $3K? – JoeTaxpayer Mar 2 at 12:25
  • @BenMiller - To mhoran's point - 3K may be points worth $30. Not the $3K/mo we are assuming. – JoeTaxpayer Mar 2 at 12:28
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First of all, if the income was being paid to you as an employee you would have received a W-2 form by the end of January 2019 for your work in 2018. You are not an employee, because you don't pass any of the tests. They don't dictate the time, place, or manner of your work. Most (all?) US states also require employers to provide a pay stub (physical or electronic) with each paycheck.

Now the question is, does what you do fall under 1099 income? The answer is maybe.

If the value of the credits is over $600 they would have to send you a 1099 or they would risk having to pay a fine to the IRS. If they reasonably expect you reach that $600 threshold they would have had you fill out a W-9 form early in the process, and then send you a 1099 by the end of 2019 for your income of 2018. They would also need to declare this as an expense.

If the credits were because you spent money in their store, they could be considered as a rebate. But because they aren't directly related to what you spend, it is probably safe to assume they should be reported.

Now, how do you value them?

I've been earning 3k+ in credits a month that I spend on groceries and other things.

I am assuming that credits don't equal dollars at a 1 credit = 1 dollar ratio. Because that would mean that you are spending 3K a month on groceries. Look at the paperwork from the program, that should list the ratio. A typical one is 100 points gets you $1 off your next purchase. That would set your income at $30 a month or $360 a year.

A more complex one would be if the points from store X got you gas discounts. Let’s set it at the level my local grocery does, where 100 points gets you 10 cents off a gallon of gas. This would be a complex calculation because each tank is different, as is each fill-up. Plus under these grocery store programs, there are maximum discounts and the points expire after 30 days. So are the points you use before they expire earned from your purchases (non-taxable) or are they part of your referral bonus (taxable)? Again the paperwork from the program should give the cash value of the points.

The more complex the program, the more likely the company will try to argue that they have no way of knowing what the value of the points are.

  • I wasn't clear, the credits are $1 each. So $3000. I don't only buy groceries, I do resell electronics. I know that I should obviously pay tax on those sales. – JJ890 Mar 2 at 14:21
  • @JJ890 You certainly shouldn't pay taxes on the credits and the money you make reselling things you buy with them. – Acccumulation Mar 4 at 15:47

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