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On I have many ways to earn points for doing some specific action. When I use these points to purchase an item from XBOX live will I be charged a sales tax? Or are earned points tax free, when used to purchase something from XBOX live?

I know when I purchase points a tax is levied, but I wasn't sure how they were Microsoft was managing taxes on earned points?

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Technically, taxes are on money; the points, while equivalent to money, should not be taxed. – Frank Jul 30 '12 at 18:34
I don't typically pay tax on points, period. If you go to a retail store and buy a MS point card, they don't charge any tax. (I've bought cards at GameStop, WalMart, and Target most recently) It's like a gift card. I've had GameStop charge me tax if I buy online, though, so be warned :) Also, your situation may vary depending on the part of the world you're in. – agent86 Jul 30 '12 at 18:36
As long as its in the system taxes don't need to be charged, as soon as you take it out of the system for USD then you should pay taxes on it. You don't pay taxes on owning a tv, but if you were to sell it on ebay for $$ you would then pay taxes. – Brian Jul 30 '12 at 18:45
@fbueckert You'd like to think that taxes only apply to money, but rest assured, the IRS has ways to deal to deal with your shenanigans. I'd suggest that this question be closed due to this not being a forum for accounting or legal advice and that Salman ask an actual accountant or tax lawyer in whatever jurisdiction he resides. – Fambida Jul 30 '12 at 20:35
up vote 2 down vote accepted

There is no tax associated with these points - once you've earned them, they're in your Live account and can be used at full value. I've been a Rewards member for quite some time now, and I've always gotten the full value of all the points I've earned.

This works the same way if you're a Bing Rewards member as well - you can "cash out" Bing points for Microsoft point cards, and these cards are worth their full face value in Microsoft Points.

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Do note that I believe both the asker and I are in the US, so if you're international, your local laws may vary. – agent86 Jul 30 '12 at 18:39

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