There’s an interesting ruling which came down from a tax court yesterday with regards to a couple who used their Old Blue Cash card to earn 5% cash back to buy Visa gift cards and do prepaid reloads, and to profit on the exchange. They spent over $6 million during 2013 and 2014, and generated over $300,000 in rewards which was mostly profit.
The court ruled the earnings to be taxable. The ruling notes the long-standing default position to be that credit card rewards are considered rebates and non-taxable, but considers the earnings generated in this particular instance to be taxable. I wrote many years ago similarly when analysing the issue, see My Thoughts on Taxes for Miles, Points, and Cash Back.
This case rests squarely in the legal chasm between the basic principle to broadly define income and respondent’s own policy. Petitioners’ aggressive efforts to generate Reward Dollars have created a dilemma for respondent which is largely the result of the vagueness of IRS credit card reward policy. Petitioners clearly acquired economic benefits by cleverly and relentlessly manipulating the Rewards Program. Their actions never offended American Express and had Mr. Anikeev not been so successful in his efforts he likely would have been ignored by [*14] the IRS. However, the scale of his success in acquiring rewards makes this case an extreme test of the longstanding nontaxability of credit card reward programs. To avoid offending his own longstanding policy respondent seeks to apply the cash equivalence concept. As we will explain herein we do not find it is a good fit.
Not very surprising, but quite an interesting case!
Update to clarify further (thanks to all those who chimed in below):
- The court case clearly rules that reloading cards directly or buying money orders directly is considered a taxable gain.
- The ruling also notes that buying Visa gift cards is considered purchasing a product and is thus NOT a taxable gain (e.g. if you’d spend the Visa gift cards down organically there would be no tax burden).
- The ruling also states that when using the Visa gift cards to buy money orders, that SHOULD be considered a taxable gain. (See page 6: “…Thus, it would appear that the taxable event would not be the receipt of Reward Dollars upon the purchase of their Visa gift cards but the transformation of the cards into cash equivalents that could be deposited in a bank account.”)
- However, the IRS did not make that claim; they had claimed that the purchase of Visa gift cards constitutes a gain based on the Reward Dollars received which the court ruled incorrect, and the consumer has emerged victorious.
- If the IRS would charge the consumer based on the conversion of Visa gift cards to money orders, the ruling implies that it WOULD be taxable.
- I suppose a counter-argument to this point could be: since the IRS did not go down the path of considering the conversion a profit, it appears they have some reason that they don’t want to pursue that route, and thus that leaves us the clear. Of course, always consult your own tax advisor for actual advice.
Hat tip to Milestomemories
