What Is Taxable?

Craig W. Smalley, EA
Founder/CEO
CWSEAPA PLLC
Columnist
Share this content

The other day, I was asked the following question: If a credit card gives you cash back on purchases, is that amount taxable?

When I took the EA exam, I committed the following to memory: If a bank gives you some sort of incentive to open an account, the value of the incentive is taxable as interest.

That same theory would apply to the cash back rewards given to you by credit card companies: These would be considered interest. There are other oddities that, unbeknownst to many people, are taxable.

Football is big in Florida. In fact, winning a high school state championship there is a huge deal. When it comes to the NFL, fantasy football is all the rage. Outside of the well-publicized weekly fantasy leagues, if friends get together to play a season, there is usually a buy-in.

Here’s how it works: You get ten friends or so and have a buy-in of $100. The winner of the league will get the majority of the pot, and second and third place will also get a share. The amounts that are won are taxable. The same goes for any fantasy sport that is played on any platform that has a payout for the winners of the league.

My wife loves to watch The Price is Right and Let’s Make a Deal. On those game shows, or any game show, for that matter, you can win cash and other items that have a numerical value attached to them. My favorite thing is when someone wins cash and prizes worth substantial amounts of money. The contestant gets so excited. However, I would bet you the excitement goes away at tax time, when the contestant realizes the amount they won is taxable.

Some people like to gamble. They play poker, slots, roulette, blackjack and other assorted games. Sports betting has become legal now. Then there’s the lottery. The amounts won gambling are taxable. Before the Tax Cuts and Jobs Act, if you itemized your deductions, you could deduct your gambling losses. However, for most people, this deduction is no longer applicable.

Monies made from garage sales are also taxable. You can deduct the fair market value of the items sold, arriving at a net income. Even if you have a lemonade stand, the monies that are made are taxable.  However, most lemonade stands are run by children, and they don’t make enough money to have to file a tax return.

Now, you may be asking yourself: How will the IRS know about these amounts? It’s simple. Most places have to issue you a 1099. For the other items, like fantasy sports or garage sales, a common misconception is the cash won or earned isn’t traceable.

One time, I had a client who didn’t claim $10,000 in cash they received as income. It was one of my first audits, and it was a valuable lesson. I watched the revenue agent reconstruct my client’s income. Since then, I always chuckle when a client tells me they earned cash, but it isn’t traceable. 

The moral of the story is all income is taxable, no matter how it’s derived, whether it was deposited into a bank, if it was a toaster a bank gave you or if it comes in the form of cash back rewards or money earned gambling. 

Don’t make the mistake of thinking that cash cannot be traced. It most certainly can. I have never had to go through a cash flow analysis during an audit since my first time. Trust me, you’ll never want to go through one either.

About Craig W. Smalley, EA

Craig Smalley

Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.

Replies

Please login or register to join the discussion.

By bltaxes
Sep 21st 2018 18:48

Not sure I agree with the credit card rebate if all expenses were personal in nature and not deductible (as business expenses, etc). This would be a rebate on personal consumption. Yes, I agree if the S&L gives you a TV for opening a CD, then it is taxable (and well documented as such). Just my 2 cents. Not important to the story. These clients keep tax defense firms in business. Just get your fee up front. The client has already told you their character, but we are here to serve everyone.

Thanks (2)
avatar
to bltaxes
Sep 28th 2018 02:27

Great post. I agree that credit card rebates on personal use credit cards are not income. Rebates in general are a reduction of basis on the item purchased. I agree, shady clients who think they are smarter than they really are, get your fees up front, or just refuse to deal with them in the first place. It makes me chuckle what some people think they can get away with.

Thanks (0)