U.S. resident Konstantin Anikeev found a way to make large sums of money “out of thin air” on credit card cashback, but after years of litigation will still have to pay taxes on part of that amount, the Wall Street Journal reported.
Anikeev found a credit card with an unlimited 5% cashback for supermarket purchases. He bought gift cards at the supermarkets, exchanged the cards for money orders, and in turn cashed the orders into his bank account. The fees for gift cards and money orders were much lower than the cashback, so he could make money practically out of thin air.
During 2013-2014, the resourceful American made more than $6 million in transactions, but such unusually high credit card spending drew the attention of the Internal Revenue Service (IRS) and the agency conducted a tax audit and demanded he pay an income tax of $300,000.
As a result of the years-long trial, Anikeev will have to pay taxes on only a small fraction of the transactions. But authorities are already thinking about how to close the loophole for the future. Normally, a cashback is treated as a discount on a purchase and is not taxable, but in this case, the court felt it was necessary to pay tax on the profits from the purchase of payment orders.
In addition, the judge offered the IRS a way to close the tax loophole. So, if gift cards can be treated as property, then exchanging them for money orders can be treated as a sale of property with a gain, and the gain is subject to income tax.
Anikeev is disappointed with the court ruling. According to him, traditional tax classification of payment instructions de-facto does not allow charging taxes from profit received upon their purchase.
The publication cites the opinion of tax law expert, professor at Indiana University Stephanie Hoffer, who considers the court’s decision strange. Indeed, a cashback is usually regarded as a discount on the purchase and is not taxed. But Anikeev de facto didn’t buy anything, meaning his cashback is clearly taxable income, not a discount, she said.