Taxable Income Debate

A physicist’s financial experiment netted him $300,000 From Credit-Card Rewards now the IRS wants its cut.

Konstantin Anikeev, an experimental physicist, assembled everything he needed for an inquiry far outside his field.

His materials included American Express cards, the government’s view that credit-card rewards aren’t income, and his own willingness to spend time buying gift cards and money orders. He pulled the concept from personal-finance websites: Exploit the difference between unlimited 5% rewards and lower fees on gift cards and money orders.

Methodology

  • American Express card offered unlimited 5% rewards at grocery stores and pharmacies after he had spent $6,500. 
  • Use reward cards to buy $1 coins from the US Mint. The transaction has no shipping charges.
  • Used gift cards to buy money orders, then used the money orders to make deposits in his bank account, then used that money to pay his credit-card bill.
  • In a $500 transaction, the 5% rewards would yield $25—more than enough to cover gift-card fees of about $5 and the $1 fee on the money order.

The IRS got interested in millions of these transactions by one person. The IRS took Anikeev to court where he was largely vindicated.

Tax Court vs Konstantin Anikeev

In US Tax Court vs Konstantin Anikeev, the court issued a split decision. 

The court affirmed that credit-card rewards are usually nontaxable rebates. Buying anything for $100 and getting $5 back is akin to paying $95 in the first place. 

Most of Anikeev's transactions were of that nature. 

Then it gets murky. The judge also ruled rewards earned on purchases of money orders or reloading debit cards are taxable.

Anikeev will owe some back taxes on a portion of that $300,000.

New Rules from American Express

American Express has rules on cash equivalents and will undoubtedly strengthen them.

The IRS will likely make rules changes as well. 

For now, I cheer Anikeev for his ingenuity. 

His lawyer said “He’s a very mathematical, brilliant person. And this was just something he thought was fun."

Mish

 

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