Taxes on cash back credit card rewards

Question

Me and a friend discussed a potential loop hole in cash back credit cards. I want to write up a research article to pursue this further. Lets says I have a credit card with 10% cash back rewards. I also open up an online credit card processor that charges 3% on all transactions. If I charge myself a $100 to get a cup of water, would I:

earn $7 (7%) tax-free dollars on each transaction? - https://www.investopedia.com/ask/answers/110614/are-credit-card-rewards-considered-taxable-income-irs.asp
have $3 (3%) loss that can be deducted from my income tax?
if all transactions occur in a sales tax-free state like Delaware, no other fees are involved?
is it legal to buy and sell from and to yourself?

Is this helpful? https://money.stackexchange.com/questions/127891/did-i-discover-an-easy-way-to-make-money-via-paypal-and-cashback-credit-card-if?rq=1 — littleadv, Nov 17 '22 at 00:59
@littleadv Unfortunately, no. We considered that idea long ago and discovered immediate flaws with taxes and income. In fact, this idea sprung from an article where a researcher bought cash cards via an AMEX CC with 5%. He made $300K of tax free money. However, his concept only got revealed when he was sued by the IRS. He still won. — SILENT, Nov 17 '22 at 04:25
That 10% is coming, for the most part, in the fees the issuer charges the processor. — chepner, Nov 17 '22 at 12:44
"Lets says I have a credit card with 10% cash back rewards" Let us know when you do. The rest of the question is irrelevant without that. — ceejayoz, Nov 17 '22 at 14:16
@ceejayoz I didn't find 10% but 6% on top spending category. Its no cap or at least wasn't listed like the other cards. — SILENT, Nov 17 '22 at 15:22
@SILENT This would be a lot easier to discuss if you'd share the name of the card. The Amex BCP, for example, gets 6% at supermarkets, but capped at $360/year. The Venmo card sometimes has a sign-up bonus of 6% on top category, but that's only valid for a certain number of months. If you try putting a million dollars through one of these - especially to one vendor you control - you'll find they consider that "gaming" the rewards program and will cancel your card and take the rewards back. — ceejayoz, Nov 17 '22 at 15:41
@ceejayoz Its the venmo card. I had no idea they could take the rewards back since their docs don't mentioning anything and theres no article of anyone trying and failing with it. Might still be interesting research article to put out. — SILENT, Nov 18 '22 at 11:36
@SILENT Anyone with a rewards program will have something about abuse of the program in their terms. The Venmo card's say "Synchrony reserves the right to remove any participant from the Program in the event of fraud or abuse in connection with the Program." That's in there for scenarios like your plan. — ceejayoz, Nov 18 '22 at 12:42
If you charge yourself, it's a cash advance. Nobody gives you rewards on cash advances. If you process this as anything but a cash advance, you are committing fraud. — David Schwartz, Nov 20 '22 at 05:43

score 7 · Answer 1 · answered Nov 17 '22 at 00:42

7

Among the issues

You can't realistically get a credit card that would give you 10% back.
You can only deduct losses to the extent that you are running a business. That requires that you show an intention of turning the profit. Unless you were successfully selling $100 cups of water to a lot of other people, your losses would almost certainly be disallowed.
Any cash-back card is going to have terms that disallow this sort of sham sales. And they'll notice pretty quick that 100% of sales are being made to a single customer. At best, they'll close your account. More likely, they'll try to claw back any rewards you've received.

answered Nov 17 '22 at 00:42

Justin Cave

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Didn't find a 10% but already got a card with 6%.
I had no idea there was a rule that specified showing intent of turning a profit. If the purchase page is available publicly online, is that enough intent? I mean, people buy crazy things for insane prices all the time. Value is in the eyes of the beholder.
Read the terms carefully on this. Surprisingly, nothing other than the usual vague liabilities claims. Not sure how they claw back the rewards without adding charges. I don't even think the credit card company is losing money but more the credit card processor is.

SILENT

Nov 17 '22 at 04:22

1

@SILENT 6% on everything? Permanently? Plenty of cards have short-term bonuses when you sign up, but they'd be losing money on that in the long run and they're usually capped at a certain level of spend. – ceejayoz Nov 17 '22 at 14:15

@SILENT - Assuming you're in the US, you'd need to consider the IRS guidance for a business vs a hobby. https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business It seems very unlikely that your business would meet the criteria unless you actually found other people that actually wanted to spend $100 on a glass of water. – Justin Cave Nov 17 '22 at 15:02

Ben Voigt · Accepted Answer · 2022-11-18T15:18:57.827

Your $10 cashback is tax free.

However, your water-selling business made a profit of $95 = $100 - $1.85 (for the glass) - $.15 (for the water) - $3 (for the credit card processing fee).

You'll get to pay federal income tax on that $95 net income, which will more than erase the cashback.

Plus the card issuer has certainly written the cashback terms and conditions to exclude self-dealing. So now you have no cashback, $3 in credit card processing fees, and taxes on $95 net business income.

score 0 · Answer 3 · answered Nov 19 '22 at 22:04

Sure, if you could get a credit card that gives a 10% cash back reward, while you have to pay about 3% in credit card fees every time you sell something, you could make a bundle by buying things from yourself.

The catch to that is that I don't know where you think you're going to get a credit card with 10% cash back reward. More common is 1% or maybe 2%. For the very obvious reason that if the bank was charging 3% and paying out 10% on every dollar, they would quickly go broke. Whether you are buying things from yourself or someone else, the bank would go broke.

A bank might offer a money-losing deal as a promotion to drum up new customers. Maybe possibly you could find such a deal where they hadn't thought out the restrictions well enough, and you could take advantage and make a killing before they caught on and cancelled the promotion.

So sure, you could fantasize about, What if some business offered to give me money to use their services instead of charging me? In real life, that's not likely to happen.

Taxes on cash back credit card rewards

3 Answers3