A resident of the United States, Konstantin Anikeev, found a way to earn large sums of money “out of thin air” on cashback from a credit card, but after years of litigation he will still have to pay taxes on part of this amount, the Wall Street Journal reported.
Anikeev found a credit card with an unlimited cashback of 5% for purchases in supermarkets. In supermarkets, he bought gift cards, exchanged cards for payment orders, and in turn cashed the orders into his bank account. Fees for gift cards and payment orders were significantly less than cashback, so money could be made almost out of thin air.
In 2013-2014, the resourceful American conducted transactions for more than $ 6 million, but such unusually high spending from a credit card attracted the attention of the US Internal Revenue Service (IRS) and the department conducted a tax audit and demanded to pay income tax in the amount of $ 300 thousand.
According to the results of a long-term trial, Anikeev will have to pay taxes on only a small fraction of transactions. But the authorities are already thinking how to close the loophole for the future. Usually, cashback is considered a discount on purchases and is not taxed, but in this case, the court considered that it was necessary to pay tax on 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 viewed as property, then their exchange for payment orders can be viewed as a sale of property with a profit, and the profit can be taxed with income tax.
Anikeev is disappointed with the court’s decision. According to him, the traditional tax classification of payment orders de facto does not allow levying taxes on the profits received from their purchase.
The publication cites the opinion of a tax lawyer, professor at Indiana University Stephanie Hoffer, who considers the court’s decision strange. Indeed, cashback is usually considered a discount on purchases and is tax-free. But Anikeev de facto did not buy anything, that is, his cashback is an explicit taxable income, not a discount, she noted.
In 2020, in the first half of the year, the share of non-cash payments in Russia increased by 67%. The growth in the number of transactions with bank cards increased fivefold. Banks stimulate non-cash payments using cashback and various loyalty programs.