03/08/2021
Ryan and I have been asked about this article by multiple people today.
To those concerned:
You probably have nothing to worry about.
The general rule of thumb is that credit card rewards are not taxable, as long as you spent money to earn them. The net result of this guy’s practices is that he did NOT spend money to earn his rewards. I’ll explain more below.
Here are three important takeaways relevant to our award travel strategies:
-miles, points, and even cash back earned from credit card sign up bonuses (the way we earn most of our points and miles) are generally not taxable because you have to spend a minimum amount to earn that bonus. For example, with the current offer, you have to spend $4,000 in 6 months to earn the welcome bonus of 60k Amex Membership Rewards points on the Amex Gold Card. If there is no minimum spending requirement, it is possible you could be taxed on that bonus. That said, most travel cards worth opening will have a spending requirement even if it’s low.
-rewards earned from everyday spending are generally not taxable. The exception would be cash equivalents which I’ll explain below.
-if you refer a friend and earn bonus points for that referral, you could be taxed on that referral bonus amount (but the welcome bonus your friend earns would not be taxable). For example, several Amex cards earn 15k points if you refer a friend with your personal link. You could be taxed on those 15k points. The value of those points is determined by the bank and you’ll receive a 1099 stating the value. The last time I received this type of 1099, it was from Chase and I believe those Chase Ultimate Rewards points were valued at 1 cent each (we value them higher, so that’s a win 😀)
Ok so here’s the explanation of what this guy did if you don’t want to read the article:
The years in question are 2013 and 2014. The methods by which this man earned the cash back rewards are no longer possible. He would purchase a certain type of visa gift card or debit reload card with a credit card for a low fee and then liquidate it by purchasing a money order. Then he would cash the money order, pay off the credit card, then repeat.
Most merchants no longer allow credit cards for debit reload or cash equivalent purchases. Some may allow Visa gift cards, but the fees to do this whole process now generally outweigh the rewards earned. Also, American Express now receives data from merchants that is specific enough to determine if a card holder is buying an abnormal amount of giftcards or cash equivalents on a regular basis. This guy would have been shut down almost immediately (by Amex) if Amex’s current level of scrutiny existed in 2013.
While not illegal, his methods are often the same methods criminals use to launder money which is obviously illegal. Since he had such a large volume of transactions, he was flagged and the agency that would investigate such crimes sent his case to the IRS.
Because he liquidated the cash equivalents, he did not actually spend any money to earn the rewards earned on the cash equivalents.
The judge determined that the rewards earned from the visa gift cards were not taxable because they are “products” 🤷♀️, but the rewards earned from cash equivalents (debit reloads and money orders) were taxable.
Hope this clears up some things, but I’m happy to answer any questions!
A physicist used credit-card rewards, gift cards and money orders to generate more than $300,000. Then the IRS went after him.
