With the South Korean Winter Olympics just a week away, thousands of athletes are beginning to converge on the PyeongChang region and of participants from around the world are finalizing their physical and mental preparations. 2018 will bring out a projected 2,925 athletes from 92 countries into South Korea. The 2018 U.S. Olympic Team is comprised of 242 athletes (135 men, 107 women). For a number of reasons, including snow-deficiencies in the majority of countries (let’s ignore the Jamaican bobsled teams for the moment), the Winter Olympics are just as exciting, but a bit smaller-scale than the Summer Games. Compared to the 2016 Rio Summer Olympics, the Winter Games will feature about 70% less athletes from less than half as many countries.
Despite ongoing concerns from northern neighbor Kim Jong Un, the Russian athletic (doping) ban and the ever-present political rhetoric surrounding the Olympics, the participants, coaches, volunteers and billions of fans are looking forward to the world-class competition and the inevitable “Olympic stories” that will be unfolding over the next few weeks.
Benjamin Franklin’s classic quote: “’In this world nothing can be said to be certain, except death and taxes,” is as true today as it was over 200 years ago. The elite Olympians have the potential to make significant sums competing and—like with all things profitable —Uncle Sam has historically been eager, willing and able to take his “fair share” from Olympic medalists.
The lifetime bragging rights that come with simply participating in the Olympics, taking home ANY medal will generally immortalize the athletes and their future earnings potential. But the majority of Americans standing on the podium this year should be even happier than their predecessors for one big reason – tax-free winnings! Yes, thanks to the actions of the 2016 Congress and President Obama in October of 2016, most current and future U.S. Olympians and Paralympians will not be subjected to federal taxes on their cash and medal awards presented by the United States Olympic Committee. However, they will still be fully taxed on their sponsorships and other income, as well as any subsequent disposition of their medal(s).
The general public – and Olympians – were historically shocked to find out that the federal and most state governments would tax their winnings at rates well over 50% in many cases. However, thanks to the decades-long efforts of Florida Senator Marco Rubio, South Dakota Senator Thune, Olympic representatives and other legislators, federal taxability of the majority of U.S. medal winners ended (retroactively) with the 2016 Rio Olympians.
However, like all good tax legislation, there are exceptions to the exemption…. When a U.S. Olympian has both competitive Olympic Games success and happens to also win the hearts of the public and advertisers, they may lose the aforementioned tax break and end up paying full-boat federal tax on their Olympic cash awards, medals and sponsorships.
Winning an Olympic medal can often translate into very lucrative endorsement contracts and paid speaking engagements for months, years and even decades for selected Olympians. Walking away with an Olympic gold (or any other) medal can have a dramatic effect on the athlete’s public and financial legacy. With an impressive performance at the games, and/ or a sympathetic appearance without a medal, athletes can quickly go from zero to hero overnight.
Under the 2016 change, taxability of Olympic medals and cash awards kicks in after an individual’s Adjusted Gross Income (AGI – generally gross income, before inclusion of the medal and cash award, and before deducting Schedule A itemized deductions) jumps over the $1 million threshold as stated in new IRC Section 74(d) Title 26 IRC Section 74 . The logic being that the elite athletes that do not get major endorsement contracts obtain the tax exemption, while the ultra-successful Olympians clearly has the wherewithal to pay the taxes on their performance awards.
Examples of well-heeled Winter Olympians that will likely not be eligible for the exemption include high-profile athletes such as: Lindsey Vonn (estimated net worth $3+ Million), Shaun White (estimated net worth $45+ Million), Mikaela Shiffrin (estimated net worth $2+ Million), and Ted Ligety (estimated net worth $2+ Million), to name a few Winter Olympians who will likely exceed the $1 Million AGI threshold in 2018, however, some of their endorsement contracts may have deferral terms to push income out into 2019 to avoid exceeding the $1 million threshold.
Endorsements are not the only way Olympic participants are building their bank accounts. Winning Olympians won’t be flying home empty handed, they will be carrying a very tangible piece of hardware with them – in the form of the coveted gold, silver or bronze medal. But they may be surprised that their gold medal only has about 1% gold (6 grams to be exact), with the balance being silver. Silver medalists get 100% of the represented medal and the bronze medal is an alloy made up of 90% copper and 10% zinc. So the winners walk away with a medal which has an intrinsic (e.g. raw material value) worth ranging from $635 for gold, $351 for silver and a measly $3.65 for bronze, based on pre-Olympic commodity prices. The table below reflects the composition and intrinsic value of the 2018 medals:
The fact that the medals do not have a significant intrinsic value is great news from a tax standpoint. From a U.S. tax perspective, the aforementioned medal values are generally what will be includable for federal income tax purposes and becomes the recipient’s “tax basis”, which will impact any future dispositions. In the open market their value can be exponentially greater. Depending on the specific sport, the historical significance surrounding the win, and the “back-story” on the individual athlete, these medals can go for thousands of dollars, and in rare cases even millions. The general range of gold medals on the open market can range up $10,000 for gold, $7,500 for silver and $5,000 for bronze, as seen on bidding sites as well as collectors such as, eBay and Online Sports Collectors. These extrinsic values are referred to as the “fair market value”, which comes into play if and when the athlete decides to sell, gift, contribute to charity, or otherwise dispose of the medal.
One of the highest priced Olympic gold medals was a medal won by legendary track and field Olympian Jesse Owens from the Berlin Olympics in 1936, which sold at auction for approximately $1.4 million dollars in 2013. The second highest medal was a 1980 gold medal won by the miraculous U.S. men’s hockey team. While these values are clearly an outlier rather than the rule, it gives you an idea of just how valuable some Olympic medals can be in the future. The value of an Olympic medal will generally have much more value and tax complexities when the athlete passes on, since the much higher fair market value will be included in the athlete’s taxable estate – potentially generating a 40% estate tax if their taxable estate exceeds $11.2 million (single)/ $24.4 million (joint). The fair market value at death also generally becomes the new tax basis in the hands of the heirs, which determines the taxable gain or loss on sale, or certain other “taxable” transfers. The taxable gain will generally be the difference between the ultimate sale price and the athlete/ recipient’s original “tax basis” discussed above. Transferring the medal to a family member (other than a spouse) or friend as a gift can also trigger potential gift tax up to 40%. In addition to the value of the medal(s), a number of countries, including the U.S., offer cash rewards to medal winners.
Almost every country offers some type of cash reward for the recipients of medals. For this coming 2018 Winter Olympics the payouts have increased by 50% for gold and silver and bronze recipients to $37,500, $22,500 and $15,000, respectively. While these increases are significant, the U.S. still looks a bit fugal when compared to some other counties.
The honor for the largest cash awards, based on the Summer 2016 Olympics, goes to Singapore which awarded gold medalists with a staggering $753,000 payout. Falling in second and third place are Indonesia, $383,000 and Azerbaijan, $255,000. With the United states falling ninth on the list it is not surprising that these highest paying nations all share historically low number of Olympic medals earned. If we compare their results in the last three Summer Olympics to the U.S., the United States had a total of three hundred fourteen medals while Azerbaijan earned twenty-two, Thailand fifteen, and the Philippines none.
Unfortunately for those athletes watching from the sidelines in Russia, many of them will not get the chance to try and earn the $135,000 offered for gold by Mr. Putin (in 2016).
Another tax issue for the participants takes the form of tax deductions competitors are allowed to offset against their compensation. For most of the men and women participating in the Olympics, their participation can be classified as a business activity. As such, they are allowed to take certain deductions with which to offset any income earned at the event, just like any other business owner. This may not be an important issue for high profile athletes in sports which are fully funded by the U.S. Olympic Committee, or others. However, not all sports and athletes are funded and many of these competitors will be relying on friends, family and personal savings to fund their travel and/ or pay for expenses while at the Olympics. A portion of these out-of-pocket costs can be tax deductible (generally on IRS Form Schedule C – IRS Schedule C (Sole Proprietorship)) to offset all or a portion of their related taxable income from their Olympic winnings, or endorsements they receive during the year.
Rest assured, the vast majority of the Olympic athletes are motivated primarily by their competitive nature and super-human talent, rather than pre-tax or after-tax dollars, so you can be confident that these athletes will be giving it their absolute best effort in the coming weeks. Blood, sweat, and tears will be shed primarily for lifetime bragging rights, and secondarily for after-tax financial gain.
Have a question? Contact Blake Christian. Your comments are always welcome!