You know how normally when you make a bunch of money, you need to pay taxes? Well, gather 'round and hear the tale of Konstantin Anikeev, the theoretical physicist who defied the laws of efficient markets
The internet is filled with potential 100x investments, supposed "passive income" and “get rich quick” schemes, most of which I don’t listen to for more than a few seconds. But this guy did it for real. With a bunch of gift cards, a few minutes a day and the legal precedent that credit-card rewards aren’t income, he created an infinite money machine.
The Blueprint for the Money Machine
In 2012, after earning his PhD from MIT and doing whatever theoretic physicists do, Anikeev turned his attention to credit cards. While browsing personal finance websites, he found that his AmEx card offered unlimited 5% rewards at grocery stores and pharmacies after he spent $6,500, with not limits.
He also noted that grocery stores sell pre-paid gift cards, which only charge a 1% fee.
Then he created his plan: him and his wife would buy as many Visa gift cards as possible using their 5% rewards AmEx Blue cards. Because they couldn’t transfer the gift card into a checking account, they used the cards to buy money orders, which could be used to pay off the credit card balance.
The 5% rewards on purchases would more than cover the 0.8-1.2% fee on the gift cards and 0.07-0.33% fee on money orders.
All of the purchases on Visa gift cards earned Reward Dollars, which Anikeev could redeem as statement credits. The beauty of this plan is is that according to the IRS, rebates and reward points are treated as a discount and not income. Meaning the money was truly free.
The Perpetual Money Machine
Between 2013 and 2014, while working for IBM as a consultant, Anikeev put his plan into action. He would stop by grocery stores on his commute to purchase the maximum allowable amount of prepaid gift cards per day. He then bought money orders using those gift cards and deposited them into his bank account. This cycle allowed him to pocket the difference between the rewards and fees, effectively turning his credit card into a perpetual money machine.
In a $500 transaction, the 5% rewards would yield $25, which was more than enough to cover the gift-card fees of about $5 and the $1 fee on the money order. It was a beautiful, self-sustaining money-making machine.
In 2013, Over the course of 2013 and 2014, Konstantin and his wife managed to rack up a staggering $6.4 million in credit-card charges, netting them $36,200 in 2013 and $277,275 in 2014.
That's about $313,000 total or $402,000 in todays dollars... tax free.
Of course, the fun couldn't last forever. While American Express didn’t mind it, Anikeev’s tomfoolery soon caught the attention of Uncle Sam. The IRS issued a “notice of deficiency” to him and his wife, claiming the money made through the scheme was income and should be taxed accordingly. Anikeev, however, argued that it was simply rebates on purchases.
The Verdict
At trial, the IRS argued that the Anikeevs purchased cash equivalents like Visa gift cards and reloadable debit cards instead of goods or services, making the rewards they received taxable income under section 61 of the Internal Revenue Code. The Anikeevs countered that the rewards were not taxable and that the manner of purchase and ultimate use of the Visa gift cards should not matter.
It wasn’t until 2021 that the U.S. Tax Count finally came to a ruling in Anikeev v. Commisioner. In a surprising turn of events, the judge sided with Anikeev. The ruling stated that the AmEx perpetual money machine was non-taxable because the Visa gift cards were a product, not a cash equivalent.
The judge explained that a taxpayer who takes advantage of discounts in acquiring goods and services has no accession to wealth but simply has reduced consumption. The income tax law imposes a tax only on the future penny earned, not on the current penny saved.
Konstantin you son of a bitch, you did it.
The Legacy of Anikeev's Infinite Money Machine
Konstantin Anikeev's story is a fascinating case study in creativity, determination, and clever financial planning. His infinite money machine not only allowed him to earn a substantial sum of money but also to keep it all tax-free. While it's unlikely that we'll see a repeat of this particular strategy anytime soon, it serves as a testament to the potential rewards of thinking outside the box.
Anikeev is one of the few people in history to bend the rules of business and economics, earning him a place in financial folklore. And while his methods might not be replicable for everyone, they do offer an important lesson: sometimes the opportunity isn’t too good to be true. Konstantin created a tax-free money without going to jail. It’s too bad TikTok wasn’t around to give it a ton of likes.