Paypal: Beware Sending Money as a Gift

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Earlier this week, I wrote about how Popmoney was now available in my Ally account and that it’s a great alternative to paying fees to Paypal to do the same thing. As it turns out, Paypal has a “Personal” option that lets you pay back your friends without paying fees. When you go to Send Money, click on the Personal tab underneath the amount and you are given several options: gift, payment owed, cash advance, living expense, and other. Sending money as a “Gift,” the very first option, reduces or completely eliminates the fee that Paypal charges the recipient. This is perfect for paying back your friends through Paypal without them dinging you for a fee.

There is one big drawback to this though, which doesn’t matter much if you intend to only repay your friends – you lose all of your fraud protection. When you send money for a purchase, you can make a claim if you don’t receive the item or you receive the wrong item. Either way, there’s some Buyer Protection involved, which you are paying for whenever that fee gets charged. The problem with paying with a Gift is that it’s you’ve gifted them the funds – you have zero protection. If you buy something on eBay and they want you to pay as a gift, don’t do it.

Gifts to friends you know are OK, gifts to eBay sellers who want to save a few bucks – run away. (plus it’s fraudulent because you aren’t really giving them a gift)

{ 11 comments, please add your thoughts now! }

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11 Responses to “Paypal: Beware Sending Money as a Gift”

  1. Daniel says:

    They likely want to save a few bucks on fees (and not have to report the income), but if they want to skirt the IRS here, what makes you think they’re so ethical that they wouldn’t screw you over later?

    • Sloan says:

      37 years in retail and a lot of time dealing with fees.
      The designation of a payment as a purchase versus a gift avoids a fee that is imposed by the middleman (paypal). If it is for fraud protection then great but the beneficiary of the protection (the buyer) should be paying the fee, not the seller. Few buyers will wish to increase their costs by 3% especially if they can see that the EBay seller has wonderful reviews. The credit card industry survives on the fact that they charge fees to the seller that should inure to the buyer. The cost if the increased price of all goods to all buyers. Talk about your parasitic relationship.
      From a tax perspective characterizing a sale as a gift is really about not reporting income. That is fraud and is a separate issue. How the buyer characterizes a payment is a completely different decision than whether the seller chooses to hide or declare the income.
      I hope this clarifies the situation barganeers.

  2. Wilma says:

    When I was investigating PayPal this past week, I saw that send a gift option. Never saw it before. I was upset to receive an email telling me that I could only spend about $1200 till I was cut off unless I linked a bank account to my PayPal account. Apparently the $10,000 credit limit on my Visa isn’t enough. After going to the community on the PP site I found many others in the same boat. Issues abound with PP and I’m going to limit my use of this service that I thought was a nifty idea when I joined. It’s ashame cause I planned to go Christmas shopping on EBAY this year.

    • Alan Z says:

      Why do you have an issue linking a paypal account to your bank? If its just a limit issue, then link the bank and its solved. It’s also a way for them to make sure you are who you say you are. Another reason is that if your CC gets maxed out, they use your bank account as a back up. It also works the other way around. Either way they try to find money to pay for what you want to. They’ll never go and look into how much your credit limit is.

      I have no idea why people always complain about paypal, I’ve been using them for more than 10 years now with tons of purchases, money transfers, ebay auctions, even selling stuff using their merchant services. I’ve never ran into an issue.

      • Dave D says:

        My issue with linking a bank account is that it becomes the default. Now every time I make a paypal purchase I need to remember to select my credit card.

        • Strebkr says:

          It costs them less to process these payments. So they try to default to it. You just need to remember to change it to your card every time.

      • govenar says:

        I haven’t had any problems with PayPal (though I don’t use it that much). But I think some people think there’s a risk that if PayPal disagrees with you about something, they’ll pull money from your linked bank account.

  3. cvargo says:

    Discover Card is now doing the same thing it is called money messenger. It stays at your purchase rate but no fees. And you get the 0% fraud liability guarantee that they offer. Check it out when you log in on line.

  4. skylog says:

    i have used the gift option many times with friends without incident. clearly, the prescribed method.

    that said, as i actively sell items via ebay and other sites, i know that certain buyers and sellers online want payment via the gift option as it reduces or eliminates fees. there is no protection when it is used. i also have seen that paypal has started “going after” these transactions quite a bit, with those found in violation losing their accounts.

  5. adam smith says:

    My girlfriend and I send money back and forth all the time using Paypal. It’s never been an issue till today. I put $3,000 in her account and asked her to tranfer it to my PP account and they tried to charge her. She tried as a gift funded from her bank account, not credit or debit. No luck. Then she tried $1,000. No luck. Then she tried $60 and it went right through. PP wouldn’t tell me why said she had to call, but that’s total b.s.
    PLUS, I would have had that money on my PP card. Interest for them. Now it’s going on my Mango card instead. They can just sit and spin for being stupid.

  6. me says:

    they ding you with 3% now on ALL transfers

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