Court Rules Credit Card Rewards TAXABLE!... In Some Cases

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A court here in the US has just ruled that profits from large scale manufactured spending are taxable! And when the IRS comes after you, it is very hard to get out of it.

Take a listen to the case of Mr and Mrs Anikeev. The case pertains to their actions in the years 2013 and 2014, but it has only just been resolved.

So these two people both had american express cards. A card we will call the Old Blue Cash, basically an old version of this card. I found an article about how the rewards system used to work…

you earn 5% cash back at grocery stores, gas stations, and pharmacies. The card offers no annual fee, but you have to spend a minimum of $6,500 on the credit card before the bonus categories start earning 5% cash back.

So basically once you have surpassed $6500 in spending for the year, you can earn unlimited 5% cash back at supermarkets! Doesn’t that seem like a recipe for abuse? And abuse is what this couple did. Here is their strategy as described in the court ruling.

The Strategy

To generate as many Reward Dollars as possible, petitioners used the 1005 Card and the 1001 Card (American Express cards) to buy as many Visa gift cards as they could from local grocery stores and pharmacies. In addition to the values of the gift cards, petitioners were charged service fees for the gift cards of between 0.8% and 1.2% of the gift cards’ face values. They used the gift cards to purchase money orders and were charged service fees for the money orders between 0.07% and 0.33% of the dollar amounts of the money orders. They deposited the money orders into their bank accounts.

That money would then be used to pay off the cards, but they were earning 5% rewards with fees of around 1.5% so they were making a 3.5% profit on every dollar.

The case states all of petitioners’ charges of more than $400 in single transactions with the American Express cards during 2013 and 2014 were for Visa gift cards, reloadable debit cards, or money orders. They spend $1.2 million in 2013 on these things and over $5 million in 2014.

And using this method they earned over $300,000 in extra income, $35k in 2013 and $276k in 2014.

Now obviously Amex closed their accounts, personally I am surprised they were able to get away with it for two years. And now Amex has limits on cashback in the supermarket category on many of its cards. For example on the Amex Gold 4x points per dollar is limited to $26,000 per year and 3% and 6% cash back at supermarkets on the blue cash and blue cash preferred cards is limited to $6000 in spending per year.

So they have flipped it round, after $6000 it is 1%, where as before over $6500 was infinite 5%!

As for the couple in question, they now owe the IRS probably up to $100,000 depending on their income plus interest for their manufactured spending escapade. The judge ruled that Visa gift cards counted as “cash equivalents” rather than products and thus the rebates from their purchases were taxable. Now dont get worried, if you buy a visa gift card and then use that card in the normal way, to buy products, then it would not count and the rewards would not be taxable, it is only if you find some way to use that gift card to pay off your credit card that those rewards would become taxable, and the card companies and the IRS will only notice if you do it on a large scale.

But I would say the moral of the story is don’t do manufactured spending! There are a lot of other ways to earn credit card points, such as doing referrals. Amex is now offering up to 35,000 points for every person you refer on your amex gold account. There are also sign up bonuses, right now the Amex Platinum is offering 75,000 points and 10 points per dollar on gas for a limited time as a sign up bonus.

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