Interchange ruled to be Interest

According to Bloomberg, after a decade-long battle, a U.S. Tax Court ruled in favor of Capital One Financial Corp. saying that the bank’s income from Interchange fees that merchants pay on customer purchases should be regarded as interest subject to tax-deferral rules. The Internal Revenue Service argued the fees are taxable upon receipt.

Interchange “compensates lenders for the time value of their money,” Tax Court Judge Harry A. Haines wrote in the decision. “Interchange rates take into account other factors such as credit and fraud risk, processing costs and Visa’s and MasterCard’s efforts to maximize their business.”

This decision affects an estimated $48 billion in fees U.S. credit-card issuers collect each year.  The court ruled against Capital One on another issue, denying deductions the company claimed related to the cost of awarding points that cardholders use to buy airline tickets.

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