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Here it is: I send money to a family member via PayPal using my credit card, PayPal charges a fee but the cash back I get from the PayPal transaction exceeds the PayPal fee, my family member sends me the money back for free.

My concern is that my card might process sending money via PayPal to a friend differently from how it processes payments to a merchant via PayPal. For instance, it could count as a cash advance and that would likely incur other fees. Furthermore, I don't want to break any laws or agreements.

Edit: A customer service representative said that the card processes a PayPal payment to friends or family as it would a purchase.

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    Why do you care whether PayPal or your credit card company is the one who loses money as long as it isn't you who is losing money? Do it quick, waking up your sleepyhead cousin if you need to, because someone is going to notice the flood of transactions as the rest of the readership of money.SE starts cashing in on the deal you have discovered and your window of opportunity is going to slam shut very soon.
    – Dilip Sarwate
    Commented Jul 16, 2020 at 17:45
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    Are you sure the cashback is higher than the fee? What is your cashback rate and what is the PayPal fee?
    – TTT
    Commented Jul 16, 2020 at 18:51
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    Which credit card do you have that is giving 5% cashback on everything?
    – Ben Miller
    Commented Jul 16, 2020 at 20:22
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    @BenMiller-RememberMonica: Believe it. "qualifying purchases are those made through the PayPal wallet online, when you send money to Friends and Family via PayPal using your Discover Card, and point-of-sale transactions using PayPal Here" discover.com/credit-cards/cashback-bonus/cashback-calendar.html (emphasis mine)
    – Ben Voigt
    Commented Jul 16, 2020 at 21:17
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    The transaction limit implies to me that Discover or PayPal (or the combination, they could have collaborated on this) decided that allowing this was an acceptable premium to get people used to sending money this way. It is really no different from the $100 or so promotions to get you to take and use a new credit card. There are people who search for the premiums on getting new credit cards to collect the rewards. Check the fine print, there may be a limit on how many times you can do this, but go for it.
    – Ross Millikan
    Commented Jul 17, 2020 at 2:52

4 Answers 4

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Update (2022): It may be possible to earn double cash back for new accounts in the first year. I cannot find anything in the terms or conditions that would exclude this. If that's the case and you maxed out the offer, then you could add an additional $75 to your profit listed below.

Congrats! You found a legitimate arbitrage situation that indeed could make you some money. These are increasingly rare, which does make it kind of cool, even if you end up not taking advantage of it. IMHO it's not worth it due to the spending cap.

The deal you Discovered appears to pay 5% on PayPal transactions, including those made to friends and family, but unfortunately it is capped at $1500. So, the maximum cash back you can achieve is $75. The minimum the PayPal fees would be is 2.9% + $0.30 for a single transaction, which is $43.80. Your profit from this would be $31.20 minus whatever you have to give to your friend to convince them to go along with it and give you your money back.

In the US, cash back on purchases from individuals (but not businesses) is typically treated as a discount on your purchase, and is not taxable.

Here's the fine print of the deal: enter image description here

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    And good luck in convincing people, as this is the setup for a well known scam.
    – vsz
    Commented Jul 17, 2020 at 4:34
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    @PiKindOfGuy yeah, that's a little vague... The main type of rewards that are taxable are sign-up bonuses that aren't associated with a particular purchase. Cash back is considered a discount because you are purchasing with after-tax money. More info here: investopedia.com/ask/answers/110614/… An exception might be if you used a CC to donate to a charity, and then took a tax deduction for that amount. If you then receive cash back on that purchase, you would technically have to reduce the amount of the deduction you took.
    – TTT
    Commented Jul 17, 2020 at 6:44
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    Since sending money to your friend is not a purchase (and the OP even gets it back), I doubt the "cash back" is tax free here.
    – CodesInChaos
    Commented Jul 17, 2020 at 10:43
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    In other words, you can get a reward of tens of dollars for the time, hassle, and risk of moving around thousands of dollars with a person you really trust. It would probably be more lucrative to just find a part time job.
    – Seth R
    Commented Jul 17, 2020 at 14:37
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    Even if this is legitimate, it looks a heck of a lot like money-laundering. The financial and personal costs associated with a legal defense probably aren't worth the effort.
    – jpaugh
    Commented Jul 17, 2020 at 16:40
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Many years ago some US bank gave you air miles for cash withdrawals, and a couple took out all their savings in cash, paid it back in, drew it all out again and repeat. They managed to withdraw about 7 million dollars, obviously also paid in 7 million, getting tons of air miles, until the bank acted.

That was apparently totally legal.

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    See also businessinsider.com/…
    – user1936752
    Commented Jul 17, 2020 at 16:14
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    Of course it was legal. Why would a company's poorly thought out marketing scheme be illegal to take advantage of? One thing that might be triggered is an investigation of deposits of $10,000+, but as there is a perfectly fine paper trail as to the source of the money, it wouldn't trigger any legal action.
    – Michael Richardson
    Commented Jul 17, 2020 at 16:32
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    Or see the infamous Hoover Air Miles promotion in the UK en.wikipedia.org/wiki/Hoover_free_flights_promotion. Hoover offered free £600 flights from UK to US for a purchase of £100 or more. They were surprised how many people took them up on it!
    – Dragonel
    Commented Jul 17, 2020 at 16:42
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Yes, and it falls into the same category as banks paying you money to open a checking account with them.

Businesses call this "customer acquisition costs" and they work pretty hard to enumerate it to a specific number. They can tell you it costs them on average $231.14 in marketing costs to land a new customer (or whatever the figure is for them).

Sometimes this can be direct; banks used to give out toasters for opening a new account. PBS gives out tote bags.

So some bright bulb in the marketing department said "hey, why don't we just pay this money to our customers directly?" Because people would rather have money than a toaster. You've seen 1000 variations on this... This promotion of PayPal's is cut from that cloth.

As TTT points out, PayPal has installed practical limits to the promotion, which make it "not worth the trouble" to do it in the manner you plan. However it works out rather nicely to use the promotion the way PayPal intends: to just buy stuff you're gonna buy anyway, but instead, use PayPal to pay for it.

That is precisely the goal: to acclimate you into the idea of using PayPal in ways you've never used before. The idea is, you'll find it so convenient you'll keep doing it once the promotion runs out.

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I am not a lawyer but I suspect that if the finance/legal bods at your credit card company and/or paypal realized this was going on they would consider it to be a form of cash advance.

Paypal explicitly prohibits the use of PayPal accounts as a means of obtaining cash advances. IIRC Credit card companies often also reserve the right to treat a transaction that is effectively a cash advance as one, even if it was reported through the payment network as a purchase.

In connection with your use of our websites, your PayPal account, the PayPal services, > or in the course of your interactions with PayPal, other PayPal customers, or third parties, you must not:
<--snip other prohibitions-->
Provide yourself a cash advance from your credit card (or help others to do so);

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    There is explicit support for sending money to friends using a credit card, both on the Paypal side (where the fee of 2.9% is assessed, which is comparable to cash advance fees) and on the Discover Bank side, where they specifically say that the 5% cashback applies to using the Discover credit card to send money through Paypal to friends. So no, it is not prohibited, and both the credit card company and Paypal know exactly what is going on. Unless you are arguing that receiving money from the friend at some future point changes the send money transaction from encouraged to prohibited?
    – Ben Voigt
    Commented Jul 17, 2020 at 17:55
  • Clearly the rule in the paypal rules can't be aimed at properly documented cash advances since paypal doesn't offer those. So it must be aimed at combinations of transactions that effectively form a cash advance.
    – Peter Green
    Commented Jul 17, 2020 at 18:23
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    In practice of course if you use your paypal account once to give a friend a cash advance will almost certainly get away with it because paypal can't easilly tell the difference between a bona-fide personal payment and. OTOH if you do it on a large scale I suspect paypal will start asking questions (and freezing your account if you don't provide satisfactory answers).
    – Peter Green
    Commented Jul 17, 2020 at 18:27

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