Man Makes $300,000 Racking up $6.4 Million in Credit-Card Charges

Mish

By juggling credit cards, money orders, and gift cards, a man made $300,000 then the IRS stepped in.

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

 

Comments (16)
No. 1-8
Eddie_T
Eddie_T

Brilliant! My hat is off to anybody who can beat the sleazeball CC companies....or the IRS, which is even better.

Way to out-scam the scammers.

Doug78
Doug78

A Great arbitrage! When it comes to arbitrage scientists rule.

JimK
JimK

Why not just deposit the $1 coins directly into his bank account?

1 Reply

Carl_R
Carl_R

I think he did. As I understand the above:

  1. He purchased gift cards with his credit card, resulting in rewards cards, so he now had both gift cards and rewards cards.
  2. With the rewards cards, he purchased $1 coins and deposited them in his bank.
  3. With the gift cards, he purchased money orders, which he also deposited in his bank.

He had no fees on the coins. He did have fees on the gift cards and money orders, but they were smaller than his rewards cards.

Sechel
Sechel

Sounds like an updated version of the coupon queen

Six000mileyear
Six000mileyear

The ruling that rewards on buying money orders and reloading debit cards are income makes criminals of even the most honest people using those services. And with that legal precedent, those companies, through no fault of their own, may see their businesses suffer because a judge legislated from the bench.

The best thing the judge could have done is declare the actions legal and let the IRS request Congress pass a law to define rebates, coupons, rewards and frequent flyer miles.

Casual_Observer
Casual_Observer

How did he get to spend so much in credit? Was he being funded by someone?

PecuniaNonOlet
PecuniaNonOlet

There are whole groups dedicated to do this kind of thing with hotels, airlines, etc. It is called “manufactured spend” and the idea is to get points or cash from credit card companies. You likely see the tv commercials all the time for capital one airline points or hyatt credit card, etc.

While I take advantage of these kinds of bonuses I would never take it to that extreme and “launder” money orders for points. Seems like the risk too high and reward too low. For that kind of gambling, I would just buy/sell options on the stock market. It takes seconds to place an order, no driving around buying gift cards and coins.

With the IRS ruling though, the hassle will be even less worth it. As usual, taxes kills another money making scheme.

PecuniaNonOlet
PecuniaNonOlet

I wonder if the British might want to jump in on these churning schemes, seems like they are losing market share after Brexit.


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