Airline Miles and your Income Taxes

This is a question I am often asked:

Are Airline Miles taxable?

It is a legitimate question. Airline Miles are an asset. They do have value. You can redeem them for something else of value. You can even split them up in a divorce. The question of taxation of airline miles as Income becomes even more concerning if you are earning miles for trips pain for by your employer. After all, you are then earning the miles on your employers dime (and time) and are earning them while performing your duties towards your job. Would the miles earned then not be considered income or compensation? After all, if your employer gives you a reward which has tangible value – say a trip or a car – they have to add its value to your W2 or 1099. Why not miles?Now before you jump to the answer I have found thru my research, I want to point out that I am not a tax attorney, a tax advisor or even an accountant. Please consult your tax advisor or accountant before taking any decisions regarding your taxes. Anyone who knows anything about the IRS will agree that there is no simple yes/no answer to anything related to taxes. I am sure you heard this one:

For every tax problem there is a solution which is straightforward, uncomplicated and wrong.

Here is the summary of what the IRS has to say on the topic of taxation of Airline Miles:

The IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively.

My research on this topic led me to Prof. Paul L. Caron. He is the Associate Dean of Faculty and the Charles Hartsock Professor of Law at University of Cincinnati College of Law. He has a great post on his blog where he discusses the Taxation of Airline Miles in detail, with all references to IRS memos and announcements on the topic. Please read his blog post or pass it on to your tax advisor or accountant for their reference. I exchanged emails with Prof. Caron to take his permission to reference his blog post here and also to verify that information in the blog post was the current information on this topic. He has verified that it is.

In Summary, here is what I have understood from my research:

• Airline Miles received and used for your personal use are not taxable, even if you earn them when on business travel
• This exemption does not apply if you sell or trade or barter the miles

The second point does leave some grey area. As I pointed out in my blog post on Buying, Selling and Trading miles – if I redeem my miles to get my brother-in-law a free trip to the Caribbean, would it be considered that I sold or bartered the miles if he brings me back a case of rum to show his appreciation? I hope not…Reminds me of this one:

The tax advisor had just read the story of Cinderella to his four-year-old daughter for the first time. The little girl was fascinated by the story, especially the part where the pumpkin turns into a golden coach. Suddenly she piped up, “Daddy, when the pumpkin turned into a golden coach, would that be classed as income or a long-term capital gain?”