Are Credit Card Rewards Taxable Income? Man Taxed On $310,000 In Bonuses

While several credit cards offer unlimited rewards on purchases, one man found not all purchases made with the cards equally qualify as untaxable income.

Konstantin Anikeev, who is an experimental physicist, found out the hard way when he charged $6.4 million on his American Express credit card in 2013 and 2014 that the $310,000 in rewards he earned was deemed as taxable income, The Wall Street Journal reported.

American Express offers 5% cash back in rewards and lower fees on gift cards and money order purchases.

Anikeev racked up his rewards by buying prepaid Visa gift cards at grocery stores, purchasing the maximum allowed limit each day at a store, and then using the gift cards to buy money orders to make deposits in his bank accounts and pay his credit card bill, the WSJ said.

For every $500 transaction, Anikeev would earn $25 in 5% rewards, enough to cover the gift card fees of $5 and the $1 fee for the money order.

But all of those transactions caught the attention of the Treasury Department’s Financial Crimes Enforcement Network, which is tasked with investigating money laundering, an IRS lawyer said during the trial, according to the Journal.

The case was then moved to the IRS, which contacted Anikeev to inform him he owed back taxes on the $310,000. Anikeev took the case to court, however, armed with information about how the rewards system worked.

Judge Robert Geoke’s February decision on the case was split, saying that rewards earned on purchases of Visa gift cards aren’t taxable because the cards are products, but the rewards earned on money orders or reloading debit cards are considered taxable income, the WSJ reported.

The IRS already has regulations that say that income is taxable on rewards that are not spent, such as bonuses for opening a bank account.

Anikeev told the WSJ that he was somewhat disappointed with the ruling, saying that the judge ignored that the IRS classifies money-order businesses as services that are items and shouldn’t be taxable.

As for why Anikeev racked up the rewards, his lawyer, Jeffrey Sklarz, told the news outlet, “He’s a very mathematical, brilliant person. And this was just something he thought was fun.”