There's a raging controversy over this, as Citibank gave American Airlines miles as a promotion for opening new accounts, then sent customers 1099's valuing the miles at 2.5 cents per mile.
Assuming (as seems sensible) that the miles are considered bonus interest on an account, what should the value be.
Let me give some parameters:
a) If you redeem the miles optimally, you can potentially get a value of 5 cents per mile, say 100,000 miles for an international business class ticket that would cost $5000. (But how many people would buy it for cash if they had to pay $5000?)
b) If you buy miles from airlines directly, they usually cost between
2.5 cents and 3 cents per.c) If you want to redeem them for merchandise, gift cards, or travel not directly related to a frequent flier award, they usually can be redeemed for value of 0.6 to 1.0 cents, occasionally 1.25 cents.
d) Black-market transactions generally take place at 1.0 to 1.5 cents per mile.
e) In practice, when used for award tickets, the value can vary greatly. At one extreme, I once got a last-minute ticket on a high- fare route that would have cost $2000 for 25,000 miles, a value of 8 cents per mile - but I wouldn't have bought the ticket for $2000. I have seen other times that a $100 ticket would take 50,000 miles, a value of 0.2 cents - but nobody would buy that ticket with miles of course.
f) Bulk purchasers (like Citibank) probably pay about 1 cent per mile.
g) Under the terms and conditions of the programs, miles remain the property of the airline. As such, you could argue that there is no constructive receipt until you redeem them, because the airline could revoke them at any time. (This has a bit of a tinge of a tax protester argument, but I think it's a good deal stronger that arguing that if you're not paid in gold, it's not income. I'm not sure I'd actually try it. But considering that Citi was giving American Airlines miles, and that AA is bankrupt, it makes an interesting argument.)
So what should the miles be valued at, and what is the recourse for a taxpayer who got a 1099 that overvalued the miles?
Also, assuming Citi bought them for 1 cent, what are the implications to Citi? Do they get a deduction for 2.5 cents? Do they report the difference between the purchase price and 2.5 cents as income? Is this just a con game to pump up their profits and make their customers pay the taxes on them?