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Wednesday, August 17, 2016

Olympic Medal Taxation Craziness

Every four years we usually see at least one bill introduced in Congress to make Olympic medals and related prize winnings (such as cash) non-taxable to the athletes. Why? There is no good reason for excluding this prize income.  All prizes are taxable because they are an accession to wealth which is what our income tax system is based upon. If you win a raffle or win on Jeopardy!, the prizes are taxable. Why should an Olympic medal be different?

Possible reasons offered:
  1. The athletes are representing the U.S. Sounds patriotic but the winnings are still income and we could come up with all kinds of reasons to make all income non-taxable if we tried. For example, people who work in hospitals are helping people, perhaps we should exempt their income from tax?
  2. The athlete might have to sell their medal to pay the tax. This is weak because the metal value is under $1,000. (See Forbes article by DeMarco for the estimate based on the value of gold and silver today.) Also, the U.S. athletes also get cash from the US Olympic Committee, reportedly $25K for gold, $15,000 for silver and $10,000 for bronze.  Not bad. Yes, they incur a lot of costs to prepare, but so do students earning college degrees and their income is taxed.
  3. The athletes are low income.  If they are low income, the tax system will already put them in a zero or very low tax bracket. But they are not all low income. While not all have the estimated $50 million net worth of Michael Phelps (Money magazine article), many do earn a lot of money from sponsorships or employment.
S. 2650 would exempt the value of the medal and cash prizes from the U.S. Olympic Committee. It passed the Senate on July 12 and a version is being considered by the House (H.R. 2628).

California has also joined in this craziness. AB 1944 would exempt the value of Olympic medals and associated cash prizes from California income tax through 2020.

These proposals don't meet most of the principles of good tax policy.  Most importantly, they don't meet the principle of equity and fairness. Olympic medal income is really no different from any other type of taxable income.  There is no reason to exempt it from taxable income.

What do you think?


Unknown said...

Many of these athletes dedicate the majority of each waking day to training for these events. I am a former swimmer. I spent at least 5-6 hours per day training, that does not include downtime to rest, recuperate, stretch, etc. It is a lifestyle. And in many Olympic sports most athletes make nothing in sponsorship, etc. Does Michael Phelps make a lot of money from swimming and his sponsorships? Yes. But he is one guy out of a team of many US swimmers. And that is one of the most popular sports in the Olympics. You probably could not even name 5 swimmers other than Phelps and Ledecky, and they are the only ones making any real money! The money they get as stipends for training, or winning medals, or breaking records, pales in comparison to the costs (including opportunity cost) to dedicating your life to a sport. Give them a break, well worth it.


Annette Nellen said...

Thanks for the comment. I'm still not convinced. Lots of people work long hours (lots of people today including folks with multiple low-wage jobs trying to make a living), engage in grueling work (construction workers, movers) or opt for an activity where current earnings are non-existent (authors, actors). They all pay taxes on their income. Also, once the door is opened to some taxed income, it makes it easier for others. We already have too many income exclusions (employer-provided health insurance, employer-provided meals, for example).

Unknown said...

One would wonder if direct and indirect costs could be allowed as tax deductions in connection with the prize winnings. If so, which costs? I suppose under current law the costs may be allowed as a deduction on Schedule A, but presumably some of the benefit would be phased out and lost. Would the tax law and public policy allow costs against and up to the amount of the prize winnings, the net income subject to tax might be inconsiderable. This approach might be more palatable for those who argue inclusion. See Scott Herhold's column in the Sunday Mercury News 8/21/2016.

Professor Nellen said...

David, Thanks for the comment and question. It's a good question. If it were lottery winnings, you could reduce it by the cost of the winning ticket. But this is different and we are talking about expenses incurred without a high likelihood of generating income. At some point, the athlete likely knows they have a strong chance to get into the Olympics, but that doesn't always work out and even once there, there is no guarantee of a medal. A case of several years ago involving parents of a Olympic figure skater trying to deduct some expenses as a charitable contribution, but they were not made directly to a charity. (Babilonia, 681 F2d 678 (9th Cir., 1982). Also, if the athletes are to be non-professionals, using a Schedule C seems to contradict that and the hobby loss rules likely make it an activity not engaged in for profit until they turn pro.

What do you think?

Unknown said...

The athletes are not in a trade or business, as you also have concluded. I then intuitively applied the hobby rules in my comments, where one can deduct hobby expenses up to the amount of the hobby income. The hobby expenses are claimed as an itemized deduction on Schedule A - not above the line. I have not researched this and perhaps my quick conclusion may prove to not be correct. Is there case law connected with viewing athletic activities and pursuits as a hobby?

Professor Nellen said...

I did a quick search for any Section 183 case involving an athlete but did not find any. I think you are right that treatment as an activity not engaged in for profit (a hobby) is possible. But that doesn't leave much room for any deductions as they are limited to income and only deductible as a miscellaneous itemized deduction.

Unknown said...

This begs the question of how athletes are taxed on sport sponsorships, speaking engagements, photo ops and other miscellaneous income. Care is necessary to decide when the athlete crosses the ‘taxable line’ so that income funding becomes taxable either:

• Because he or she is a ‘professional’ for tax purposes or
• It is taxable as miscellaneous income.

The answers to these questions will depend on the facts and circumstances of each case. I image that many of the medalist winners will be thrust into new financial situations and possible enhanced economic arrangements. The taxation of the awards may be insignificant in view of larger subsequent contracts. However, I suppose that an award winner in archery may be different that an award winner in track and field.

I just finished Shoe Dog, Phil Knight's book telling the story of Nike. I really enjoyed the book. In reading Phil's account, I was reminded of the importance of contracting with up and coming athletes with financially rewarding sports sponsorship -- sooner than later. I noticed all the Nike wear at the Olympics, and of course the Puma wear connected with the lucrative contract with Usain Bolt.

So I suppose there is always a broader story connected with these types of questions.