Why You Should Give Air Miles a Wide Berth

Illustration by Brock Davis

What’s a frequent-flier mile worth? If you signed up for a Citibank account last year, you might be wondering. The bank offered between 25,000 and 40,000 “free” American Airlines miles to new customers, then surprised account holders by reporting points to the Internal Revenue Service. Citi valued the bonus miles at about 2.5 cents each, which translated into roughly $350 in tax liability for some consumers—or the price of a round-trip ticket from New York to Dallas.

Citi says it’s just complying with the law. But the move stunned many in the travel industry. The IRS ruled a decade ago that miles earned from business travel for personal purposes weren’t taxable. In recent statements, however, the agency has warmed to the idea of taxing airline miles from new bank accounts.

The most surprising thing about Citi’s decision is the value it assigned each mile. A recent survey by NerdWallet suggested the value of most frequent-flier miles clocks in at less than a cent, well below Citi’s valuation. Travel columnist Ed Perkins has estimated the retail price of a reward point ranges between 0.7 and 1.5 cents. “Is Citi’s valuation fair?” Perkins asks. “No, it isn’t.”

He’s right. Airlines value their own miles at far less—just a fraction of a cent, if their annual reports are to be believed. And a careful study of the fine print on your mileage program suggests the miles hold no value at all because they “do not constitute property” of the member. Technically they belong to the airline, which retains the power to alter or revoke them at any time.

Citibank’s decision may make miles more trouble than they’re worth. Consider how difficult some airlines make it to actually use the miles. With about 10 trillion unused frequent-flier miles in circulation, that adds up to a lot of frustrated frequent fliers. For them, miles that are taxed may effectively have a negative value.

It looks as if the question of a mile’s value may be addressed soon—in court. Citibank is now facing a lawsuit by customers who say its valuation of 2.5 cents per mile is “grossly unfair and deceptive.” Citibank said the company is “confident” that the miles are valued fairly. Just how fair, or deceptive, will probably be up to the judge. The actual value of a mile, however, may be up to the IRS to decide.