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.

Lance Armstrong’s Tax Problem

You may have read or heard that Lance Armstrong has been stripped of his seven Tour de France victories because of doping. The UCI Management Committee stated that it would not award the titles stripped from Armstrong to any other riders. History books will show no winner of the race between the years 1999 and 2005. UCI has demanded that Armstrong return his winnings from the vacated years, an amount estimated at approximately $4 million.

SCA Promotions, a Dallas insurance firm, has indicated that it will demand repayment of bonuses it insured for Armstrong’s wins in 2002, 2003 and 2004. It is reportedly seeking approximately $12 million.

There wasn’t much goodwill between SCA and Armstrong to begin with. SCA delayed paying a $5 million bonus for his 2005 win, responding to then-swirling allegations and controversies surrounding possible drug use. Armstrong sued, and SCA settled the case.

Then there are the endorsements. Armstrong earned more than $17 million in endorsements and speaking fees in 2005, when he won his last Tour de France. That amount grew to an estimated $21 million in 2010. And do not forget that Armstrong was the founder and driving force behind the Livestrong Foundation, which assists those struggling with cancer. Nike, Honey Stinger and Easton Bell Sports have dropped his endorsement, for example, and make seek clawback of prior monies.

Let us suppose that Armstrong has to repay some of these monies. What are the tax consequences to Armstrong?

The first step is easy: Armstrong will be entitled to a deduction. The repayment is tied to monies originally earned in his trade or business as a cyclist or spokesman, so the tax linkage is clear.

The second question is one of tax benefit. Armstrong paid taxes on these monies in prior years. Can he go back and have the IRS refund those monies? There is the rub. What would be your argument for amending those tax years?

You:     He had to repay those monies.

Me:      Did he not have unrestricted access to those monies in the prior year?

You:     I am not saying that. He did, but now he has to pay it back.

Me:      So is the transaction we are talking about for the year he received the money or the year he   pays it back?

You:     What is the difference?

Me:      He earned it in 2004 but pays it back in 2013. What year do you amend?

You:     You cannot amend 2013. It hasn’t happened yet.

Me:      So you would amend 2004?

You:     Yep.

Me:      There are two issues. The IRS is going to have a problem with your argument that he did not receive the money and owe tax. He did receive the money. And the IRS will expect its tax, because in 2004 he had no reason to think that he wasn’t entitled to keep the money.

You:     What is the second issue?

Me:      You cannot amend 2004. Remember, a tax year is open for only three years. The statute period has long since expired.

You:     So I am stuck with 2013?

Me:      That’s right.

Let’s pursue this point of tax benefit a bit further. Let’s say that Armstrong was in the maximum tax bracket in 2004. Let’s also say that his income for 2013 is not what it was in 2004. How much tax does he recoup from repaying prior winnings? You guessed it: whatever the deduction saves him in 2013, which can be a very different – and much smaller – amount than what he actually paid in 2004.

You:     That doesn’t seem fair!

Me:      There is one more tax option.

That option is IRS Section 1341, sometimes referred to the “claim of right” section. The “claim of right” concept is something akin to “I thought at the time that the money was mine to keep.” Section 1341 gives one the option to:   

            

(1)    Deduct the payment in the year of repayment, or

(2)    Calculate a hypothetical tax, excluding the repaid income from the tax year originally received. That gives one a change in tax. One then calculates the tax for the year of repayment, not including the repayment itself, and subtracts the previously-calculated change in tax from that tax.

You:     Huh?

Me:      Let’s use an example. Say that Armstrong repays $3 million in 2013. Let’s further say (to keep this easy) that the entire $3 million was attributable to 2004 winnings and endorsements. We go back and recompute his 2004 income tax excluding that $3 million. Let’s say his tax goes down by $1,050,000 (3,000,000 * 35%).

You:     OK, so he gets a $1.05 million tax break.

Me:      Not yet. There is another step.

Let’s say that his 2013 taxable income is also $3 million. We estimate his 2013 tax on the $3 million to be $1,027,000 (granted, no one can guess what taxes will be).  His tax benefit is limited to $1,027,000, not the $1,050,000 from 2004.

You:     So he loses over $22 grand. That isn’t too bad, all things considered.

In our example, you are right. The $22 grand is small potatoes. But we used a very simple example. 

Let us complicate the scenario. What if the athlete’s knock-it-out-of-the-park income years are behind him or her? Let’s use a football player. Say that he had an 8-year NFL career. What if he has to pay back $2 million several years after retirement? It is very possible that he will never again be in the same tax bracket as when he was playing. That said, he would never get back the actual tax he paid on the income, whether one uses Section 1341 or not.

Let’s use another example. What if our athlete was frugal and saved his/her career earnings? He/she now has a very attractive portfolio of tax-exempt securities and dividend-paying stocks. Let’s say that the portfolio will generate $2 million in 2013. He/she pays back $2 million. What do you see? Tax-exempts are – well, tax-exempt. Their tax rate is zero. Next year tax rates on dividends may go to the maximum rate. Let’s say they do. He/she will offset the maximum rate on the dividends, but remember that dividends are only a part of the $2 million the portfolio is earning. He/she is still not whole.

Section 1341 many times helps, but there is no guarantee that one will get a tax break equal to the tax actually paid when one received the income.

P.S. Armstrong resigned from the Livestrong board of directors on November 4. He had previously resigned as chairman on October 17 but had kept a seat on the board.