Be prepared to pay taxes on frequent flyer miles…sometimes

The IRS considers certain frequent flyer miles to be a taxable form of income. This tax will not affect all miles earned, only those considered to be a prize or award. Miles that were earned as a “rebate” are not taxable.

So it basically comes down to how you got the miles. Currently, miles given in exchange for opening a bank account are considered a prize or award, and thus are taxable. Miles earned for using a credit card or booking with an airline are considered a rebate, and thus are not taxable.

If you are confused by this explanation, then you are not alone. The IRS opinion that explained this nuanced difference has been receiving a lot of negative criticism for its failure to clarify the ramification of its decision and application to other types of gifts.