Isaac Brewster

Hi guys. I'm new to MS but I've found a buying group (Thedealbuyer) That looks reputable and has some great reviews. Before I dive into the realm of Buying groups I was curious as to how these types of things get reported on your taxes. It sounds like an excellent way to make some extra airline miles but I don't want a huge hassle reporting the income.

garykung

I am not a tax professional.

In theory (assuming compliance with all applicable law), all incomes received from this kind of activities are reportable. And whoever deals with you have to send you a 1099 once you hit $600. You will have a chance to deduct your expenses via Schedule C.

IRS adopts a policy disregarding benefits received from the airline's frequent flyer program. However, if you earn cashback, the cashback may be subject as income.

dethkultur

I'm not a tax professional either, but cashback from a credit card is a rebate, and rebates are never taxable.

Your profit on the coin though... maybe. If it is making a big difference in your life you may want to to be safe. I've never heard of these buying clubs sending 1099s? I really don't think anyone will care if your hobby of flipping some coins makes you a little money in a year.

On the other hand, it might be lucrative is you put in on a Schedule C and load up your internet charges for the year, your cell phone bills for where you check your phone every 30 minutes for confirmations, and all the lunches you eat with your friends where in the last 2 min you mention that you'll split the profit 50/50 with them if they go in with you on one. Then it might be a great deal after all when you "profit" turns into a money-making write-off, because you are treating it like the business it is.

If all that sounds like pushing too far with the IRS, then I'd challenge, maybe this really doesn't qualify. Although the IRS would gradually tax a business that has no expenses at all, they'll think you are just giving away money, which is what you would be doing.

garykung

Normally, you are correct. But not in this case.

Cashback from a credit card is a rebate is an exception to income because 1) in general, credit card spending is not deductible; and 2) the cashback is treated as a discount to the purchase.

The problem with the buying group is the cashback is not really a discount to the purchase, but a profit from the purchase (as you would receive the full value back). So buying group effectively eradicates the nature of credit card and make it become a profit tool.

In fact - a recent tax case allows IRS levy back tax and penalties against a person who MSed and make a profit.

Bottom line - never says never.

dethkultur

Doesn't everyone understand that when cashback and credit card are in the same paragraph, we are talking about cashback from the purchase on the credit card statement? Profit from resale isn't called "cashback" anywhere, right?

garykung

You clearly don't understand...

Insder

Are you referencing this case: https://activerain.com/blogsview/563...tes-tax-court- ? If so, I’d read the result because the only taxable events were direct purchases of money orders or reloading debit cards. Even the purchase of VGCs were found to still be purchasing a product and thus rewards were not taxable.

mhdena

Who is supposed to do the reporting? The individual or the BG? I've never received a 1099 from a BG.

garykung

Yes. And your interpretation is logically incorrect. At the minimum - in that case, IRS did not determine direct purchases of money orders or reloading debit cards as income. Instead, IRS determined that the cashback earned from direct purchases of money orders or reloading debit cards is income.

IRC gives income a broad definition and provide only a limited exception. So when determining whether a source is income or not, IRS presumes it is unless proved otherwise.

BG.

Insder

We can sit here all day and belabor the point on how we are interpreting this; I am simply pointing out that the ruling wasn’t as doom and gloom as you framed it.

Since case law exists, I imagine the IRS will focus on true closed loop MS (direct cash equivalents), as the ruling stated. The odds that they would win a case where actual products are purchased and thus the cash back is a rebate on that purchase seems slim, but to each their own.

Personally, I’d claim any actual profit from the BG to be safe but CC cash back is out of scope IMO. I would likely adjust my business if I was doing coin deals.

garykung

As I said at the beginning - "in theory". What will actually happen remains unknown.

Again - your logic is incorrect. 26 U.S.C. § 61 defines gross income means all income from whatever source derived, unless excepted. To IRS, result, i.e. tax, is what matters. FWIW - if you do not include a few hundred of income and they are not traceable by IRS, IRS would simply let that go, given the little amount of tax. But if the unreported amount is massive, rest assure that IRS will be looking for you. In fact, many IRS cases are derived from massive unreported income.

Andy2

I agree with Garykung.

You are going to have a hard time applying the Anikeev case to a buying group. The surprisingly good result was because they were not held to have sold cash for a profit (which is economically what they did). Cash is treated differently in the law than a true product, at least according to that one court case.

If you buy a true product at a $100, and get a 2% cashback, the basis of the product is $98.

If that is a TV that you own and watch yourself, there is no taxable income. You just own a $98 TV.

If you immediately sell that TV for $105, you have $7 of taxable income. If you get a 1099 for $105, you get to put $98 as a deduction.

If instead of a 2% cash rebate, you get a bunch of frequent flier miles or hotel points, there is legitimate question as to whether they have any value. If they have $2 of value, you get the same result as you would with cash. But many argue that they have very little, if any, value.

Flyertalk is unfortunately full of ridiculous people, inspired by bloggers, who insist on a bright-line value for airline miles or hotel points. They should go to AA and look at the use of miles on a business class flight to London. The surcharges to use the miles are now often pricing at around $1,000, Where is this big value?

I will always argue that what you are getting with points/miles is essentially a valueless coupon for future travel. If everything works out perfectly (you actually want to purchase what the coupon can be redeemed for), you might save a few bucks compared to what you would have otherwise spent. But I wouldn't use the value that these credit card hawking bloggers present as some kind of "fair market value" for them

BOS_George

Cash back reduces cost of goods sold, increasing profit, which is taxed. Saying that “rebates are never taxed” is a semantic game that ignores the fact that the amount of the rebate is taxable all else equal.

If you buy a widget for $100 and sell it to a buying group for $200, assuming no other expenses you’ll be taxed on $100 in net income. If you receive a cash rebate of $50 from any source your cost is now $50 and net income is $150. At a 25% marginal rate your tax liability has increased from $25 to $37.50, equivalent to the rebate being taxed as income.

BOS_George

Your opinion is wrong. See above.

Andy2

Rebates reduce the basis of what you purchased. What you do with the item you purchased determines the taxation.

If you do nothing with it but use it personally, you never get taxed. That is usually the case in life (excluding manufactured spending), so it is common to see statements like the one you correctly objected to.

If you sell it at a profit (after the basis reduction). you normally get taxed. The one exception, amazingly, is that certain cash equivalents don't get a basis reduction. So a lot of the manufactured spending the folks in the Tax Court case involving the AMEX Blue card did not get the bad tax result that many of us expected (and the one the judge clearly wanted to impose if the IRS had not for some reason stopped arguing for a basis reduction to cash or cash equivalents).