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Frequent Contributor
w20031424
Posts: 360
Registered: ‎10-17-2012
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Is profit from manufactured spending taxable?

[ Edited ]

Let's leave the moral issues of manufactured spending aside for a while.

 

Today I leant that CC's cashback bonus is not taxable because it is considered a discount or rebate, accoring to IRS and various tax law experts. And CC opening bonus is taxable because it's considered a gift.

 

However, for those manufactured spending profit, it is actually "income" right? Just think about the Citi TYP 5% abuse, it's not real purchase, so no "discount" excuse here. 

 

Any ideas?  Thanks. :smileyhappy:

 

BTW.. I don't do any serious manufactured spending like those on FlyerTalk who charge hundreds of thousands of month..   Only one time to meet the $3K spending requirement. So please... don't count me one of them.

 

Also.. Sometimes I don't know whether I should report those CC opening bonus under $600, which means no 1099 form is issued to IRS, CSP $400 for example. CC opening bonus from several card issuers can add up to $1K in a year for me..  Any suggestions?

 

Fide Amex 15K | Barclays Reward 3.5K | Citi Forward Student 5K | Discover IT 12.8K | US Cash Reward 6K | GE Paypal 5.5K | Wal Discover 6K | CapOne 3.5K | Kohl's 0.3K
Senior Contributor
longtimelurker
Posts: 5,933
Registered: ‎04-22-2013
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Re: Is profit from manufactured spending taxable?

He protests too much!

 

But anyway: I disagree about it not being a real purchase.    I go into a nearby CVS and purchase two VR cards with $500 loaded on to each.  CVS charges my credit card $1,007.90.  A friend, with really bad dental issues buys 8  Oral-B Professional Care Smart Series 4000 Power toothbrush, at $139.95 each, and her credit card gets charged $1119.92 (+ tax in some places).

 

In both cases our credit cards give us rewards, which ARE rebates.   I have bought a (rather expensive) white plastic card, she has bought 8 fancy toothbrushes.  Why should the tax treatment be different?

 

 

Most active cards: Amex BC ($50K), Cap One QS ($33K) Fidelity Amex ($20K)
Others: CSP, Freedom, Chase Amazon, Cap One QS, Penfed Plat Rewards (x2), Citi TY Preferred, Citi Dividend, Citi AA Plat Select, Citi Forward, Amex BCE, Amalgamated Bank, Sallie Mae, Cash Plus
Scores May 14: EQ 848, EX 833, TU 841 (Jul)
Established Contributor
scenery_guy
Posts: 953
Registered: ‎07-24-2012
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Re: Is profit from manufactured spending taxable?

If it's profit and actual income then yes, it's taxable.

 

Example: You buy VR cards for $500 each for $1,007.90 and then go buy ten widgets that are on sale somewhere for a great price and sell them on eBay for $1,500 before eBay and PayPal fees. You earned income on the difference between the $1,500 less $1,007.90 less the eBay and PayPal fees. A good businessperson would have tracked miles related to this and deduct them at $0.565 per mile as well. And more deductions are available but for the sake of the example let's leave it at that. 

You fill this out as additional or other income on your Federal return. If it's not a total combined income of $599 I would forget about it. More and you should be reporting it but that's your choice. 

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HiLine
Posts: 2,849
Registered: ‎10-19-2012
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Re: Is profit from manufactured spending taxable?


w20031424 wrote:

Let's leave the moral issues of manufactured spending aside for a while.

 

Today I leant that CC's cashback bonus is not taxable because it is considered a discount or rebate, accoring to IRS and various tax law experts. And CC opening bonus is taxable because it's considered a gift.

 

However, for those manufactured spending profit, it is actually "income" right? Just think about the Citi TYP 5% abuse, it's not real purchase, so no "discount" excuse here. 

 


It is not income per se. Think about it. If you buy something and resell it for a profit, would the first purchase be considered income?

Established Contributor
andre181
Posts: 624
Registered: ‎07-29-2010
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Re: Is profit from manufactured spending taxable?

[ Edited ]

As an accountant, I can say with 100% certainty, the rewards earned would not directly be considered income, but ultimately, if you are being 100% truthful with the IRS, it would end up being taxed.

 

As as example, lets say I buy a TV that is normally $800 but on sale at Best Buy for $500 (we will ignore sales tax to make life easy). I buy the TV online using my Discover card through ShopDiscover, so I earn 5% cash back or $25. As you said, the $25 is considered a rebate or discount, which is not taxable under IRS regs. If you keep the item, no tax. 

 

Now lets take it a step further. Lets say I immediately sell the TV for $700. The profit from the sale would be the $700 selling price minus the $475 I paid for the TV (which is the $500 I paid minus the rebate of $25). So the net profit is $225 all of which would be taxable (like mentioned before, other expenses could be deducted to lower taxable income related to the transaction). So in essance, the cash back is treated as a discount on cost of goods sold so the cash back is not directly taxable, but does increase your net profit of items sold, which will result in higher taxable income. This would be the proper way to report this, however most wouldn't do it this way. Most people would never even report selling the TV for a profit. Whether you should or not is up to you, but the way I described would be the way the IRS would like you to do it. 

 

And to report the CC opening bonuses that you do not get 1099s for, you'd report them on IRS Form 1040, line 21- Other Income. Add it all up and put the total on this line, and include a written statement detailing each amount, where it was from, and approximately when it occured. They'll be happy with that. 

Discover IT $24K | FNBO Visa $20K | Citi Forward $12.5K | US Bank Cash+ Visa Sig $10K | Priceline/Barclays $10K | Amazon/Chase Visa Sig $8.3k | Citi ThankYou Preferred $6.5K | BoA Cash Rewards 1-2-3 Sig $7.5K | Sallie Mae World MC/Barclays $5K | Capital One Cash Rewards $5K | Commerce Bank $5K | WF Cash Back Visa $3.6K | Amazon/GEMB $2.5K | Younkers/Comenity $2.4K | AMEX BCE $2K Target $1K | AMEX Green
EX FICO (from AMEX): 754, TU08 FICO (from Discover): 755, AAoA: 3.6 years
Senior Contributor
longtimelurker
Posts: 5,933
Registered: ‎04-22-2013
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Re: Is profit from manufactured spending taxable?


andre181 wrote:

As an accountant, I can say with 100% certainty, the rewards earned would not directly be considered income, but ultimately, if you are being 100% truthful with the IRS, it would end up being taxed.

 

As as example, lets say I buy a TV that is normally $800 but on sale at Best Buy for $500 (we will ignore sales tax to make life easy). I buy the TV online using my Discover card through ShopDiscover, so I earn 5% cash back or $25. As you said, the $25 is considered a rebate or discount, which is not taxable under IRS regs. If you keep the item, no tax. 

 

Now lets take it a step further. Lets say I immediately sell the TV for $700. The profit from the sale would be the $700 selling price minus the $475 I paid for the TV (which is the $500 I paid minus the rebate of $25). So the net profit is $225 all of which would be taxable (like mentioned before, other expenses could be deducted to lower taxable income related to the transaction). So in essance, the cash back is treated as a discount on cost of goods sold so the cash back is not directly taxable, but does increase your net profit of items sold, which will result in higher taxable income. This would be the proper way to report this, however most wouldn't do it this way. Most people would never even report selling the TV for a profit. Whether you should or not is up to you, but the way I described would be the way the IRS would like you to do it. 

 

And to report the CC opening bonuses that you do not get 1099s for, you'd report them on IRS Form 1040, line 21- Other Income. Add it all up and put the total on this line, and include a written statement detailing each amount, where it was from, and approximately when it occured. They'll be happy with that. 


OK, but what about a usual MS scenario, where I buy 2 $500 VR cards for $1007.90, and I get a 5% rebate from my credit card.   Then I move the $1000 on the cards to my bank account via Amex BlueBird.   That doesn't seem to be a sale?  Of course, I am doing it because I make a profit of $50-$7.90, but isn't that the rebate when applied to any other purchase.

Most active cards: Amex BC ($50K), Cap One QS ($33K) Fidelity Amex ($20K)
Others: CSP, Freedom, Chase Amazon, Cap One QS, Penfed Plat Rewards (x2), Citi TY Preferred, Citi Dividend, Citi AA Plat Select, Citi Forward, Amex BCE, Amalgamated Bank, Sallie Mae, Cash Plus
Scores May 14: EQ 848, EX 833, TU 841 (Jul)
Established Contributor
andre181
Posts: 624
Registered: ‎07-29-2010
0

Re: Is profit from manufactured spending taxable?


longtimelurker wrote:

andre181 wrote:

As an accountant, I can say with 100% certainty, the rewards earned would not directly be considered income, but ultimately, if you are being 100% truthful with the IRS, it would end up being taxed.

 

As as example, lets say I buy a TV that is normally $800 but on sale at Best Buy for $500 (we will ignore sales tax to make life easy). I buy the TV online using my Discover card through ShopDiscover, so I earn 5% cash back or $25. As you said, the $25 is considered a rebate or discount, which is not taxable under IRS regs. If you keep the item, no tax. 

 

Now lets take it a step further. Lets say I immediately sell the TV for $700. The profit from the sale would be the $700 selling price minus the $475 I paid for the TV (which is the $500 I paid minus the rebate of $25). So the net profit is $225 all of which would be taxable (like mentioned before, other expenses could be deducted to lower taxable income related to the transaction). So in essance, the cash back is treated as a discount on cost of goods sold so the cash back is not directly taxable, but does increase your net profit of items sold, which will result in higher taxable income. This would be the proper way to report this, however most wouldn't do it this way. Most people would never even report selling the TV for a profit. Whether you should or not is up to you, but the way I described would be the way the IRS would like you to do it. 

 

And to report the CC opening bonuses that you do not get 1099s for, you'd report them on IRS Form 1040, line 21- Other Income. Add it all up and put the total on this line, and include a written statement detailing each amount, where it was from, and approximately when it occured. They'll be happy with that. 


OK, but what about a usual MS scenario, where I buy 2 $500 VR cards for $1007.90, and I get a 5% rebate from my credit card.   Then I move the $1000 on the cards to my bank account via Amex BlueBird.   That doesn't seem to be a sale?  Of course, I am doing it because I make a profit of $50-$7.90, but isn't that the rebate when applied to any other purchase.


Not taxable. You are keeping the item (the funds on the VR card) that you purchased that caused you to earn the rewards and the funds are being used for personal use.

Discover IT $24K | FNBO Visa $20K | Citi Forward $12.5K | US Bank Cash+ Visa Sig $10K | Priceline/Barclays $10K | Amazon/Chase Visa Sig $8.3k | Citi ThankYou Preferred $6.5K | BoA Cash Rewards 1-2-3 Sig $7.5K | Sallie Mae World MC/Barclays $5K | Capital One Cash Rewards $5K | Commerce Bank $5K | WF Cash Back Visa $3.6K | Amazon/GEMB $2.5K | Younkers/Comenity $2.4K | AMEX BCE $2K Target $1K | AMEX Green
EX FICO (from AMEX): 754, TU08 FICO (from Discover): 755, AAoA: 3.6 years
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HiLine
Posts: 2,849
Registered: ‎10-19-2012
0

Re: Is profit from manufactured spending taxable?


andre181 wrote:

As an accountant, I can say with 100% certainty, the rewards earned would not directly be considered income, but ultimately, if you are being 100% truthful with the IRS, it would end up being taxed.

 

As as example, lets say I buy a TV that is normally $800 but on sale at Best Buy for $500 (we will ignore sales tax to make life easy). I buy the TV online using my Discover card through ShopDiscover, so I earn 5% cash back or $25. As you said, the $25 is considered a rebate or discount, which is not taxable under IRS regs. If you keep the item, no tax. 

 

Now lets take it a step further. Lets say I immediately sell the TV for $700. The profit from the sale would be the $700 selling price minus the $475 I paid for the TV (which is the $500 I paid minus the rebate of $25). So the net profit is $225 all of which would be taxable (like mentioned before, other expenses could be deducted to lower taxable income related to the transaction). So in essance, the cash back is treated as a discount on cost of goods sold so the cash back is not directly taxable, but does increase your net profit of items sold, which will result in higher taxable income. This would be the proper way to report this, however most wouldn't do it this way. Most people would never even report selling the TV for a profit. Whether you should or not is up to you, but the way I described would be the way the IRS would like you to do it. 

 

And to report the CC opening bonuses that you do not get 1099s for, you'd report them on IRS Form 1040, line 21- Other Income. Add it all up and put the total on this line, and include a written statement detailing each amount, where it was from, and approximately when it occured. They'll be happy with that. 


+1

 

And to relate to the VR case, what you buy is a good. It is not money for accounting or tax purposes; without a company essentially buying it back from you, the fund is completely illiquid. Redeeming the VR fund for cash is the equivalent of selling the good for money and making a profit or a loss. Like andre181 said, the profit would ideally be treated as extra taxable income though most people won't report it. 


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