Faculty of law blogs / UNIVERSITY OF OXFORD

‘Cash Back’ Rewards as Taxable Gross Income: The Curious Case of Konstantin Anikeev


Richard C. Gaffney Jr.
Director of Advanced Analytics and Assistant Professor of Legal Skills at the School of Law, Duquesne University.


Time to read

3 Minutes

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Financial Regulation

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United States

On February 23, 2021, the United States Tax Court issued a split decision on the question of whether ‘cash back’ rewards issued by credit card companies are taxable gross income. In Konstantin Anikeev v. Commissioner, TC Memo 2021-23, the Court held that while generally cash back rewards are not includible in an individual taxpayer’s gross income, they might be taxable as gain in certain circumstances.

Cash back perks are a common reward among today’s credit card selections. While the typical card offers 1.5% cash back, cards offering 5% cash back awards are about as good as it gets—and Konstantin Anikeev found a way to make one even better. Armed with his American Express Card, a long-standing policy of the United States Internal Revenue Service and a simple plan, Anikeev was able to arbitrage the difference between unlimited 5% rewards and lower fees on gift cards and money orders. Anikeev 's $6.4 Million in purchases netted him more than $300,000 in ‘cash back’ rewards. Anikeev’s simple plan worked well—until the US Internal Revenue Service (IRS) claimed that Anikeev owed nearly $104,000 in income taxes.

Here is how Anikeev’s plan worked in five simple steps: 

  1. Purchasing Gift Cards. Using his American Express (Amex) 5% ‘cash back’ Rewards Program, Anikeev Purchased Visa gift cards at grocery stores or pharmacies where the 5% Rewards applied. 
  2. Converting Gift Cards to Money Orders. Although Visa cards can’t be converted to cash, they can be used to purchase Money Orders. Anikeev would purchase the Money Orders with the Visa gift cards.
  3. Depositing the Money Orders. Anikeev deposited the Money Orders to his Bank Account. 
  4. Paying the Amex Balance. Anikeev wrote checks from his Bank Account to pay off the reduced Amex Card Balance. Alternatively, Anikeev would use the Money Orders to purchase MoneyGrams to pay off the Amex balance. 
  5. Rinse and Repeat. Anikeev did this to the tune of $6.4MM in purchases and $320,000 in ‘profits.’

Although there is a service charge for the Visa Gift Card (eg, 1%) and for the Money Order (eg, 0.33%) and/or MoneyGram (eg, 0.33%), the 5% Rewards Program provided the perfect opportunity for arbitrage. As an example, say that you use your Amex card to purchase $10,000 in Visa Gift Cards. This $10,000 purchase results in $500 in cash back rewards. Net of the 1% service fee, the $9,900 value on the Gift Card buys $9,900 in Money Orders. And net of that 0.33% service fee, you will have $9,867 in Money Orders to deposit to your Bank account. Assuming no Bank deposit fees, the result is a $500 cash back reward minus a $133 fee—a $367profit.

Alternatively, you can use the $9,900 value on the Gift Card to purchase a MoneyGram and, net of the MoneyGram 0.33% fee, you will have $9,867 to send to Amex to pay off the reduced balance ($10,000 purchased reduced by 5% Rewards ($500) – or $9,500), resulting in a $367 if you deposit the Money Order to a Bank Account with no Bank fees. 

The IRS argued this was ordinary income, but the Tax Court held that it wasn’t. The Rewards Program was essentially a purchase-price discount, which the Court said has never been seen as ordinary income. But the Court opened the door for the IRS to argue that the Visa Gift Card could be viewed as an asset with a basis equal to its cost. Though the face amount might be $10,000, under Internal Revenue Code (IRC) section 1012, its cost basis would be $9,500—so that when it is exchanged for a $9,900 Money Order, there is gain ($400)—and realized gain is clearly taxable. 

Section 61(a) of the IRC defines gross income broadly. The United States Supreme Court has said that it has a ‘sweeping scope’. On the other hand, the Anikeev court noted that adjustments to the purchase prices of goods or services have consistently been considered non-taxable. The court observed that the Treasury Department’s own Renenue Ruling held that the receipt of a rebate by a retail customer does not result in the receipt of gross income. Rather, the rebate was a reduction in the purchase price, requiring a downward adjustment to the basis of the automobile pursuant to section 1012 of the IRC.

The Court also noted the long-standing IRS policy that card rewards are not taxable: ‘This policy reflects the recognition that a taxpayer who avails himself or herself of a discount in acquiring goods and services has no accession to wealth. That taxpayer has retained more of his or her wealth than a taxpayer who pays full price for the same good or service, but that taxpayer has no additional income; he or she simply has reduced consumption.’ Anikeev’s aggressive efforts to generate Reward Dollars ‘created a dilemma for respondent which is largely the result of the vagueness of IRS credit card reward policy,’ according to the court. ‘Anikeev clearly acquired economic benefits by cleverly and relentlessly manipulating the Rewards Program [but his] actions never offended American Express and had Mr. Anikeev not been so successful in his efforts he likely would have been ignored by the IRS.’ 

In an attempt to harmonize the IRS’s ‘long-standing policy’ with the fact that Anikeev acquired economic benefits by manipulating the Rewards Program, the Court offered an alternative theory of taxation, namely that the Reward Dollars reduced Anikeev’s bases in the Visa gift cards and generated proceeds when they converted the cards to money orders. 

Thus, for now at least, those ‘cash back’ rewards, rebate programs and purchase price adjustments are safe from taxation as ordinary income. But caution should be exercised when leveraging the arbitrage opportunity to generate gains, as was the curious case of Konstantin Anikeev.


Richard C. Gaffney Jr is Director of Advanced Analytics and Assistant Professor of Legal Skills at the School of Law, Duquesne University.


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