okay welcome back to patrick boyle on finance so the story i'm about to tell you today will
contradict almost everything i've taught people about risk in return about how easy it is to make
infinite money about arbitrage profits all sorts of lessons go out the window today i'm going to
tell you how an experimental physicist constantine anakiev discovered an infinite money machine
and used it to make three hundred and ten thousand dollars and then the irs could not even tax him
on the income now just to be clear normally if you make three hundred and ten thousand dollars in the
united states after taxes social security medicare and so on you'd be left with under two hundred
thousand dollars which is not enough to buy the cheapest lamborghini the euros which is a horrible
suv and not a real lamborghini thus such games while nice will impress none of the forex traders
on instagram but because constantine does not have to pay taxes on his gains he's left with the full
three hundred and ten thousand dollars which is enough money to buy a lamborghini hurricane
which while it doesn't have the right kind of doors does the job on instagram and he even has
enough money left over to get it wrapped in gold and to get one of those louis vuitton bags full of
cash that all the traders carry around with them so how did he do this how did constantine get
his hands on non-taxable gold lambo money and can you do it too well constantine took his idea from
personal finance websites the idea was to exploit the difference between unlimited five percent
credit card rewards and lower fees on gift cards and money orders he told the wall street journal
if one has a theory one can test it experimentally some require a large hadron collider to test
but this one was a bit more accessible he started out with an american express card
which offered unlimited five percent rewards on money spent at grocery stores and pharmacies
so he used this money to buy prepaid visa gift cards at grocery stores stopping often during his
commute and purchasing the maximum dollar amount allowed per day at a store he used the gift cards
to buy money orders and then use the money orders to make deposits in his bank account and then use
that money to pay his credit card bill constantine a physicist had invented a perpetual money machine
in a 500 transaction the 5 rewards would yield 25 which was more than enough to cover gift card fees
of around 5 and the 1 fee on the money order he did this between 2013 and 2014 and made about 310
000 it's a fairly straightforward approach but impressive in its sheer scale an american express
spokesman told the wall street journal that the company uses a combination of strategies to police
the rules of rewards programs that don't allow purchases of cash equivalents but what about the
taxes how did he get this money tax-free well in the united states most forms of income are taxable
but if you buy a product and get a rebate or cash back in the purchase that is not considered
income and it's not taxable most american credit cards do have rewards associated with them and
that cashback is not taxable income it's simply a reduction in the purchase price if you spend we'll
say 250 000 on a gold-plated lamborghini and get twelve thousand five hundred back it's viewed by
the irs as a two hundred and thirty seven thousand five hundred dollar purchase not as twelve
thousand five hundred dollars of income but what if you buy 6.4 million dollars worth of grocery
store gift cards exchange them for money orders that you then use to pay off your credit card bill
allowing you to keep the 310 000 in cash rewards offered by the credit card company the irs who
are notorious spoilsports didn't like this and of course sued him claiming that the money was
income and that he should not be entitled to a gold wrapped mid-range lamborghini and the
instagram fame associated with it constantine said no it's just rebates on purchases now in many ways
the irs is right surely the only way to get three hundred and ten thousand dollars of rebates is by
having more than three hundred and ten thousand dollars of taxable income if you make fifty
thousand dollars in salary and cycle it madly through your american express card until you get
three hundred and ten thousand dollars of rewards it can't really be the case that your taxable
income was only fifty thousand dollars but i think both you and i want constantine to get a gold wrap
lamborghini and so did the judge in the case the judge found that the amex perpetual money machine
works and is non-taxable because it's based on the irs policy that credit card rewards are not
income the judge wrote this policy reflects the recognition that a taxpayer who avails himself
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 the full price for the same good or service
but that taxpayer is no additional income he or she simply has reduced consumption the
judge then went on to quote benjamin franklin who wisely observed a penny saved is a penny earned
the income tax law imposes a tax only on the future penny earned not on the current penny saved
constantine the experimental physicist had the general theory that rebates on consumption are not
income he then simply ran an experiment to see if the theory held and it turns out that it does so
there you go another video on quant finance don't forget to subscribe and i'll see you next week bye