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Normally, Americans are taxed on all income, prizes and rewards. You would think that frequent flier mileage would fall within this definition of income or rewards. However, the IRS has announced that they will NOT penalize anyone and will not enforce the taxation of frequent flier miles earned as a result of business trips such as airline or train awards.
However, frequent flier miles are now being given for a variety of promotional activities. Recently, Citi Bank offered miles for setting up an account with them. They then issued IRS form 1099s to everyone for the value of their mileage in order to avoid potential penalties for not sending out form 1099s to recipients of the mileage. The problem is that the taxability of these miles that result from other types of promotions besides air travel is uncertain. If you are offered miles for buying a product or using a service, you may well be taxed on these miles until the IRS issues some announcement on the subject.