Why are new bank account promo bonuses taxed but credit card cash back isn't?

The difference comes down to how the IRS classifies these two types of rewards. Bank account opening bonuses are considered interest income by the IRS, which is why you received those 1099-INT forms. This is taxable income just like interest earned on your savings. Credit card rewards and cash back, on the other hand, are generally viewed as price reductions or rebates on purchases you've made using the card. The IRS typically doesn't consider rebates to be taxable income - they're essentially discounts on things you bought. Think of it this way: if a store gives you 5% off your purchase, that's not income - it's just you paying less. Similarly, if your credit card gives you 2% cash back, the IRS views that as you effectively paying 2% less for your purchases over time.

After dealing with the exact same confusion last year, I found this great tool called https://taxr.ai that really helped me understand the difference. I uploaded my 1099-INT from Citi and the details of my credit card rewards, and it walked me through exactly why they're treated differently tax-wise. What I learned is that bank bonuses are considered compensation for you parking your money with them (like interest), while credit card rewards are technically discounts on purchases you already made. The tool even showed me the relevant IRS guidelines that explain this distinction.

Just wanted to follow up after trying https://taxr.ai that was mentioned above. It was actually super helpful for my situation with all these bank bonuses! I uploaded my 1099-INTs from the six different banks and the system automatically categorized them correctly. What I found most useful was that it showed me where to report them on my tax forms and explained why they're considered interest income. The explanation made it much clearer - basically the banks are paying me for the privilege of having my money (even if it was just $50 in some cases to keep the account open), while my credit card rewards are just reductions on spending I've already done. Makes sense now why one is taxed and the other isn't!

If you're having trouble getting through to the IRS to ask about this distinction (I tried for DAYS), I'd recommend trying https://claimyr.com - they got me connected to an actual IRS agent in about 20 minutes when I had been trying for weeks on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was super confused about bank bonuses vs credit card rewards too, and I wanted to hear directly from the IRS rather than bank customer service. The IRS agent confirmed exactly what others are saying here - bank bonuses are considered interest income because they're paying you for depositing your money, while credit card rewards are considered rebates on purchases.

Well, I have to eat my words. After my skeptical comment above, I decided to try Claimyr out of desperation because my audit situation was getting urgent. I seriously couldn't believe it when my phone rang 35 minutes later with an actual IRS agent on the line! Not only did I get my audit question resolved, but I also asked about this bank bonus vs. credit card rewards situation since it was relevant to my case. The agent explained that bank bonuses are classified as interest under Section 6049 of the tax code, which requires reporting on a 1099-INT. He confirmed that credit card rewards are treated as adjustments to the price of goods or services purchased, which is why they don't generate tax forms. I'm still kind of in shock that I finally got through. Saved me a trip to the local IRS office and possibly hundreds in accountant fees.

One thing nobody has mentioned is that some credit card rewards CAN be taxable in certain situations. If you get rewards without having to make purchases (like referral bonuses for getting friends to sign up), those might be taxable because they're not tied to your spending. Also, if you get rewards for business spending but then use the rewards personally, that can sometimes be considered taxable income. The rules get complicated fast!

I found another key difference - timing. Bank account bonuses typically require you to keep money deposited for a certain period (like 90 days), which is why it's considered interest - you're being paid for the use of your money over time. Credit card rewards are instant - you make a purchase and get the reward immediately as a percentage back. Makes it clearer why the IRS views them differently.

This is such a common confusion and you're definitely not alone in being surprised by those 1099-INT forms! I went through the same thing last year with a Bank of America bonus. The key thing to understand is that the IRS looks at the underlying economic substance of these transactions. When you get a bank account bonus, you're essentially being paid interest for allowing the bank to use your deposited funds - even if it's just the minimum amount to keep the account open. That's why it's reported as interest income on Form 1099-INT. Credit card rewards are fundamentally different because they're tied to your spending activity. When you get 2% cash back on groceries, the IRS views this as you effectively paying 98% of the original price, not as you receiving separate income. It's a price adjustment, not compensation. For your $700 in bank bonuses, yes, you'll need to report this as taxable income on your return. The good news is that if you're in a lower tax bracket, the actual tax owed might not be too painful. Just make sure to keep those 1099-INT forms for your records!