Taxation of Olympic Winnings

The summer Olympics are going on in Tokyo. I have watched little of the competitions. As I have gotten older, I watch less and less television, Olympics included. My heaviest TV consumption is just around the corner, when the NFL season begins. I am an unabashed NFL junkie.

Let’s discuss the taxation of Olympic awards, including medals.

In general, the law taxes all awards and prizes. There are exceptions, of course, but for years there was no exception for Olympic medals and prize money.

This means that if someone won a gold medal, for example, Uncle Sam was standing on the podium with the athlete waiting for his cut.

Can you imagine having to pay tax on a gold medal?

Although a gold medal is not pure gold. The last pure gold medal was awarded in 1912, and today’s gold medals are over 90% silver. Gold medals at the 2012 London Olympics were less than 2% gold, for example.

Then there is the issue that a medal – once awarded – can be worth more than the weight of the metals that went into its manufacture. Boxing fans may remember the boxer Wladimir Klitschko from the 1996 Atlanta games. He sold his gold medal in 2012 for $1 million, donating the proceeds to charity.  

There may also be cash winnings. The U.S. Olympic and Paralympic Committee (USOPC) will pay a winning athlete approximately $37,000 per gold medal. While not bad, it pales in comparison to some other countries. Singapore will pay over $730 thousand for a gold medal, by comparison.

The real money of course is in endorsements. Usain Bolt receives $4 million per year from Puma as a brand ambassador, even after retirement. Not bad work if you can get it.

Back to tax. The general rule is that all prizes and awards are taxable, unless the Code allows an exception.

In 2016 lawmakers decided that it was a bad look to assess tax on Olympic winners. Two senators – John Thune, a Republican from South Dakota and Chuck Schumer, a Democrat from New York – submitted a bill to change this situation. Here is a joint statement, something we are unlikely to see again in the near to intermediate political future:

It’s no secret that athletes don’t become Olympians overnight. For many of the competitors who’ve been fortunate enough to earn a spot on an Olympic or Paralympic podium, it’s a lifetime’s worth of work that has come with years of blood, sweat and tears.

It’s a patriotic endeavor that often has a large price tag affiliated with it, too.

Under the current tax code, medals and any associated prize stipend are considered taxable income.

Tax policy is too often complicated and partisan, which makes the bill we introduced this year unique. Our bill passed the Senate without a dissenting vote, and is about as simple as they come. The bill, which awaits action in the House, would bar the IRS from leveeing a victory tax on Olympic and Paralympic medalists.

Preventing the IRS from taxing medals and modest cash incentive prizes sends the right message to present and future members of Team USA: Rather than viewing Olympic success as another chance to pay Uncle Sam, it’s a special opportunity to celebrate American patriotism and the Olympic tradition.

The tax on Olympic winnings was called the “victory tax,” and President Obama signed the United States Appreciation for Olympians and Paralympians Act into effect on October 7, 2016. There was an important issue, however: how were professionals (think Kevin Durant, for example) to be taxed? These athletes were already making eye-watering sums of money, and to exclude their winnings seemed … an overreach … if one was truly trying to reward the amateur athlete.

Here is the Code section:

           Code § 74 - Prizes and awards

              (d) Exception for Olympic and Paralympic medals and prizes

(1) In general

Gross income shall not include the value of any medal awarded in, or any prize money received from the United States Olympic Committee on account of, competition in the Olympic Games or Paralympic Games.

(2) Limitation based on adjusted gross income

(A) In general

Paragraph (1) shall not apply to any taxpayer for any taxable year if the adjusted gross income (determined without regard to this subsection) of such taxpayer for such taxable year exceeds $1,000,000 (half of such amount in the case of a married individual filing a separate return).

How therefore is an Olympic winner taxed?

·      There is no tax on the medal itself.

·      Prize money is not taxed unless the athlete has substantial other income, with substantial meaning over $1 million (half that if married filing separately).

·      Endorsement income is taxable as normal.

Your Child Wins A Beauty Pageant

We are in a mini “tax season” here at Galactic Command, with September 15 being the deadline for business returns. Next month is the extended due date for the individual returns.

I wanted to find something light-hearted to discuss. Call it a salve to my sanity.

Let’s talk about your kid. Yes, the one who will soon be discovered on America’s Got Talent. It could happen. He could be the next Jonathan, or she the next Charlotte.

COMMENT: Jonathan and Charlotte were discovered on Britain’s Got Talent. It is worth watching their first appearance, if only for Simon’s reaction.

Say your kid wins prize money.

This being a tax blog: who pays tax on the money – the kid or you? After all, the kid is your dependent. He/she is nowhere near emancipated.

Here is a Code section one could spend a career in practice and not see:

 § 73 Services of child.

(a)  Treatment of amounts received.

Amounts received in respect of the services of a child shall be included in his gross income and not in the gross income of the parent, even though such amounts are not received by the child.

(b)  Treatment of expenditures.

All expenditures by the parent or the child attributable to amounts which are includible in the gross income of the child (and not of the parent) solely by reason of subsection (a) shall be treated as paid or incurred by the child.

The daughter of our protagonists (Lopez) started competing in beauty pageants at age nine. There were expenses involved with this, such as travel, outfits, cosmetics and so on. In 2011 and 2012 she won a couple of dollars, approximately $3,200 to pin it down.

Which was nowhere near the expenses of over $37 grand across the two years.

They used an Enrolled Agent with over 40-years’ experience to prepare their return.

COMMENT: An E.A. is an IRS-administered exam on tax proficiency. While perhaps not as well-known as the CPA, it is a substantial credential. There are many CPAs who practice outside tax, for example, but all E.A.’s practice tax.

The E.A. decided to put the daughter’s income on the parent’s return. He arrived at that conclusion by reviewing state child labor laws. He gave it a lot of thought, but he missed Code Section 73.

As I said, it is rare that one would blow dust off that section.

He prepared the parent’s return, including the daughter’s prize money.

That part was only $3 grand or so. The sweet part was the $37 grand in expenses. The parents took a BIG tax loss.

And the IRS tagged the return.

The Lopez’s fought the IRS. There was also a second IRS adjustment, so I presume they decided that fighting one was the same effort as fighting both.

The kid’s income and expenses, however, was a clear loser.  

The IRS adjusted their income by over $30 grand, so they came in with a souped-up penalty – the “accuracy related” penalty. That bad boy parachutes in at 20%. The IRS likes to toss that one out like hot-sauce packets at Gold Star.

Remember the E.A.?

The Court pointed out that the Lopez’s hired a tax professional. He researched the issue. Granted, he arrived at the wrong answer, but that was not the Lopez’s fault. They hired a professional, and they reasonably relied upon the advice of the professional.

The Court dismissed the penalties.

Small consolation, but something.