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Comment by swampthing | Hacker News Reader

I'm not sure that's an accurate representation of how things work in the tax world. You don't pay a tax when you pay a bill, but it's likely the recipient of your money includes it as income on their tax return. Same goes for any seller - whether or not a sales tax is involved. If you were to transfer a large amount of money from your bank account to a friend's, your friend would likely have to count that money as income on their tax return (as a gift).

The way the US tax code is set up, any income is taxable unless there's an exception for it.

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Theory question:

If I gift my friend $X, and then he gifts it right back to me, and we proceed to do this back and forth ad infinitum, is it the case that the IRS would eventually bleed that money to $0?

Yes, but only via the gift tax and after you've reached the gift tax exemption, which is pretty big.

It's not that big. It's $14,000 per person per year.

I'm trying to think of a way to "test" this, like set up a couple of accounts and programmatically transfer money back and forth. I imagine most banks/processors have some sort of mechanism to limit transactions that would be considered suspect (such as automated back-and-forth transfers). But the lower limit's not a problem -- by repeating the transaction, you'd be contributing to the limit of $/year, even with a miniscule amount.

The bank doesnt report you. It is up to you to report yourself as receiving a gift. The entire US tax system works on self reporting and the fact that during audits if you have wilfully lied you will go to jail. So you can transfer some amount a million time and then just say you transferred it once and the IRS will probably never even look into it.

The bank will mandatorily report the transaction if it is $10k or greater (or a series of transactions constructed to fall under the $10k limit).

The first $5M is exempt.

You are thinking of the inheritance tax. If I recall the gift tax and the inheritance tax interact, but you only pay the inheritance tax once, when you are dead.

Minor quibble: Inheritance tax is paid by the beneficiaries, not the deceased.

36% of single filers in the US make less than $14000 per year.

But it's not strongly enforced.

Actually it'd be very interesting if it was. A lot of 20-somethings in New York get more than that from their families.

Enforcement could put an end to many unpaid intern jobs.

It's possible they could take that position, but I suspect you or your lawyer would be able to come up with a way out of most of it. For example, you could argue they were a series of interest-free loans, so there was no income to anyone (other than the forgiveness of any interest the IRS would impute to the loans). Or maybe there's an exception in the tax code for the situation you describe - I'm not a tax attorney :)

And as ebiester noted, there's an exemption for gifts under a certain amount.

Well, it'd probably get you flagged for investigation as an unusually incompetent money launderer, but I suspect you could convincingly argue that it's not taxable.

No, because the amount will get lower and lower until it gets below the exemption threshold, at which point it will remain constant.

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