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I have a Discover credit card that pays 1% cash back on and 5% on select categories. My question is: why isn't that cash back "bonus" taxed when stuff like canceled debt (1099-C), interest (1099-INT), etc, is?

I mean, I'm glad that it isn't taxed lol but it just kinda feels strange that it isn't.

  • Besides the logical "it's a price reduction" answers, there's also the fact that for most people they'd only change the tax by a few dollars, if at all. So the cost of doing the paperwork would probably exceed any additional tax collected. – jamesqf Feb 13 at 17:34
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    Are credit card rewards taxable seems to be a duplicate of this. – JTP - Apologise to Monica Feb 14 at 12:21
  • @jamesqf - funny, I get 1099s for interest of a few dollars each for multiple accounts. My annual cash back averages well over $1000/year, and it wouldn't surprise me if one day the IRS (i.e. congress) decided to tax it. – JTP - Apologise to Monica Feb 14 at 12:24
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    Looking at the portfolio of credit cards I have access to via my job, there are consumers getting more than $50,000 in rewards annually. There are even a few in this data set close to $100,000. This is probably only about 1% of the population, but I think it's safe to say that it's non-trivial. If you lower your threshold to $1,000 it's a much larger set of people (probably 10 - 20% of cardholders). – dwizum Feb 14 at 13:44
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    @Mast because I try to keep an open mind, and often prefer to let the wisdom of the crowd decide. If there's enough of a distinction, they can both stay. Even if it's close in my opinion, I'm ok letting members' decision prevail. (And we had a meta discussion regarding the okayness of near-duplicates remaining.) – JTP - Apologise to Monica Feb 14 at 17:18
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Since you get the rewards for spending, they are effectively a reduction of your purchase price (like buying items "on sale").

For most of these rewards that are given to consumers, the IRS treats them as discounts rather than income.

Source

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    also, you are not getting new income, but getting back some of your own money, money you already payed taxes for when you've got it the first time. Having to pay taxes for a cashback would mean taxing the same money twice. – vsz Feb 14 at 7:41
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    @vsz What does "taxing the same money twice" mean? What does "the same money" even mean? If I pay you €100 to fix my fence you pay taxes on it. Let's say you keep €70 and use those to pay me to fix your computer, then I pay taxes on those €70. Have we paid taxes on the same money twice? If yes, is that bad? – gerrit Feb 14 at 9:15
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    @gerrit : not really. In your example there are two completely independent modes of creation of wealth, and it makes sense to tax them both. The point of income tax is to tax the generation of wealth, so that a part of that surplus can be used by the state. However, in case of a cashback, there is no second creation of wealth. The income was generated once: when the buyer earned it (as a paycheck). The buyer then buys something, but gets a refund, or a cashback, etc. which is not a new form of income, because the buyer just got back the same money (or part of it) without providing a service. – vsz Feb 14 at 12:56
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    And this treatment by the IRS can change at anytime. – paulj Feb 14 at 13:15
  • To be 100% clear, this means that if the purchase is a tax deduction, on the books the purchase price must be reduced and the deduction reduced so more tax is paid. – stan Feb 14 at 14:58
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Cash back bonuses are viewed the same way as old-school rebates, it's seen as a savings on a purchase you've made (versus actual income) and thus isn't taxed. Similar also to how a discount received as a sale isn't taxed. One way to think of it is, you've already been taxed on your paycheck, which you used to make a purchase. It doesn't make sense to tax the 1% you get as a discount on the purchase because the income you used to make the purchase has already been taxed. You can't get your hands on that 1% cashback without already having been taxed on income.

Interest on investments, on the other hand, is new, fresh income and taxed as such. Canceled debt is essentially income (the creditor is literally paying your debt for you) and, again, is treated as such.

Of course, this all needs to be taken in the context that tax rules are often somewhat arbitrary and not always done in a way that lets you point to a consistent over-arching rule or decision process.

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    A debt has to be cancelled because of financial hardship of the borrower. And IRS wants to tax a person who is already broke. – Merin Nakarmi Feb 14 at 1:26
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    @MerinNakarmi not necessarily. Debts can be cancelled for a variety of reasons. E.g. the government student loan forgiveness program. – MyStackRunnethOver Feb 14 at 1:58
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    @MerinNakarmi: 'hardship' is subjective, but if you are bankrupt or insolvent, which are measured objectively, then cancellation of debt income is not taxed, and neither are certain mortgages that are 'qualified' as specified by law, and some student loan forgiveness programs. See irs.gov/taxtopics/tc431 and (as linked there) pub 4681. – dave_thompson_085 Feb 14 at 4:43
  • @MerinNakarmi I don't want to put myself in a position of representing or defending tax policy, but I don't understand your comment. The IRS literally can't tax someone who is broke, because you need to have money (an income) in order to be taxed. If your income is low, you will likely not have any tax actually due, or you may actually qualify for an Earned Income Credit and get free money because you had a (small) income. It's literally the opposite of being taxed! But none of that seems on topic for this question, so perhaps you should ask a new question or take this to chat. – dwizum Feb 14 at 13:38
  • @dwizum The IRS can and does garnish wages of people who owe back taxes that they don't presently have the financial ability to pay off, so it's not quite true to say that the IRS "can't" tax people who are broke. Aside from that, though, you're right that most households with low or no income pay negative federal income taxes. – reirab Feb 14 at 16:18
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The basic principle for taxation is that your income should be taxed once. You make purchases with money on which you have already paid income tax. Taxing your cashback would be double taxation. That is why you are not charged tax on cash backs.

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    That's assuming the purchase was for personal use and not business use. If I charge e.g. a hotel stay to my personal card, take the 1% reward, then claim the full amount from my employer as expenses, I'm receiving some untaxed money. – Robin Salih Feb 14 at 10:53
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It makes sense that cash back from personal credit cards is not taxable since it is simply reducing an expense which typically is not tax deductible. But the water gets murky when the cash back comes from a business credit card. The reason is that business purchases are typically tax deductible expenses, and cash back to the business owner should theoretically either reduce the deductible expense, or count as income to the business (or owner). For now though the IRS seems to have a don't-ask-don't-tell policy for business cash back too.

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Getting back your own money is not income.

If you pay $40 for something and get $1 back, it is precisely the same as if you paid $39 for that thing. Since you would not be taxed on $1 of income if you paid $39 for something, you are not taxed on $1 of income if you pay $40 for something and get $1 back.

Bonuses and rebates that behave like discounts are taxed like discounts. The IRS doesn't care what you call something, they care what the actual economic reality of the transaction is.

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