Olympians May Earn More Than Just a Medal: Tax Implications of the Rio Olympic Games
With the Rio Summer Olympics upon us, tens of thousands of athletes have converged in South America and of athletes from every corner of the world are finalizing their physical and mental preparations. An estimated 10,500 [554 U.S. athletes (262 men, 292 women)] Olympians from 207 different nations are slated to participate in this year’s Summer games.
Despite numerous high-profile drop-outs from this year’s competition, including (alleged) Russian dopers, a large number of male golfers (apparently the female golfers are much tougher) and many others spooked by Zika-carrying mosquitos, terrorist threats, crime, pollution and sub-Motel 6 accommodations, the projected number of contenders for this year’s Olympics are still set to rival the number of participants in the 2012 London Olympics.
So what is keeping the remaining Olympians eager to compete in spite of so many risks and controversies? Is it the honor of representing their home country, the glory of defeating their peers and taking home an Olympic medal. Even those not taking home a medal will always be referred to as “Former Olympian ……..”. Athletes who have opted out of these Olympics may be giving up more than just the chance to be immortalized as an Olympic champion. Besides the lifetime bragging rights that come with simply participating in the Olympics, taking home ANY medal can often immortalize the athletes and their future earnings potential.
While only a few sports will yield large team contracts for the athletes (e.g. soccer, basketball, baseball), an Olympic medal can translate into very lucrative endorsement contracts and paid speaking engagements. Walking away with an Olympic gold (or any other) medal around their neck can have a drastic effect on their public and financial legacy. With an impressive performance at the games, athletes can quickly go from zero to hero overnight. Depending on the specific sport, this overnight national or international celebrity status can lead to countless endorsement deals with big name companies and allow them to generate millions in coming years. Just take a look at Olympic swimmer, Michael Phelps. While there are not a lot of opportunities for post-Olympic swimming contracts, after his impressive performance at the 2004 Summer Olympics, where he won six gold medals, Phelps was able to double his net worth to $2.6 million, based almost entirely on endorsement deals. His follow-up performances at the 2008 and 2012 games yielded twelve more gold and two silver, and he has a current net worth estimated at $55 million.
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. That’s right, winners walk away with a medal which has an intrinsic monetary worth ranging from $600 for gold, $325 for silver and measly $5 for bronze based on current commodity prices. These medals have a relatively minor percentage of the related metal in the actual memento, so the large medals look much more valuable than they are. Obviously, the “spot price” of each of these medals changes daily and will ultimately be determined at the time of award.
The fact that the medals do not have a significant intrinsic value is great news from a tax standpoint. From a U.S. perspective, the aforementioned medal values are generally what will be includable for federal income tax purposes and becomes the recipient’s “tax basis”. This, however, is just the raw materials cost for these iconic awards. 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 ranges from $10,000 for gold, $8,000 for silver and $5,000 to $6000 for bronze. This is 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 – if ever.
One of the highest selling Olympic gold medals was a medal won by Jesse Owens at the Berlin Olympics in 1936, which sold at auction for $1.4 million dollars in 2013. While this value is 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 have much more tax impact 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 $5.45 million. The fair market value also determines the taxable gain or loss on a 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 or friend as a gift can also trigger gift tax at up to 40%.
In addition to the value of the medal(s), a number of countries, including the U.S., offer cash rewards to metal winners. Almost every country offers some type of cash reward for the recipients of medals—with rewards increasing in amount for silver and gold. Here in the United States, for every bronze, silver, or gold medal won, Olympians will receive $10,000, $15,000, $25,000, respectively. While this may seem like a pittance relative to years of training and the endorsement potential, the U.S. looks a bit frugal when compared to other counties.
The honor for the largest cash awards goes to Azerbaijan which awards bronze medalists with $130,000, silver medalists with $255,000, and gold medalists with a whopping $510,000. Rounding out the top three government compensation packages are Thailand which offers gold medal recipients with $314,000 but over a twenty year period and the Philippines which compensates its gold medal winners with $237,000 -- also over a twenty year period. It is unclear whether the 20-year payment plan is for the benefit of the Olympian or the country paying out the funds.
Not surprisingly, an interesting commonality these high paying nations all share is the 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. Makes sense why these countries are willing to pay a bit more to get their medal counts up.
Unfortunately for those athletes watching from Russia, many of them will not get the chance to try and earn the $135,000 offered for gold by Mr. Putin.
Re-visiting our friend Mr. Phelps, the recently designated U.S. flag-bearer in the opening ceremonies, by earning eight gold medals in the 2008 Olympics in Beijing, he was able to make a grand total of $200,000 through the U.S. cash rewards alone. Not a bad payout for a couple of weeks of hard work (not to mentioned decades of training and conditioning). While these cash rewards can be significant in certain cases, spread over the years of training, they are probably fairly reasonable (or even paltry) when converted to an hourly basis
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 is eager, willing and able to take his “fair share”. Depending on their tax bracket, and state of residence, U.S. Olympians could be paying as much as 50% ($12,800) for taking home the gold when you take into account the value of the medal and the cash reward. Athletes train rigorously for many years so they can bring back glory to their countries, and then—when they are successful—the government takes a rather large chunk of their Olympic prizes.
The question some in the sports world and in Congress are bringing up is whether this taxation of their winnings is fair? Luckily, there are some in Congress who oppose the taxation of Olympic athletes. Most recently, Senator John Thune, a Republican from South Dakota, drafted Senate Bill S.2650 to amend Section 74 of the tax code which would exempt Olympic and Paralympic winnings from taxation. The bill was passed in the Senate on July 12, 2016, and is currently being considered in the House of Representatives. This is not a novel idea either, back in 2012, former Presidential candidate and Florida Senator, Marco Rubio, proposed a similar bill with the goal of exempting money earned at Olympic events from an individual’s federal taxable income. As of now, none of these bills have quite taken flight and have not become law, but time will tell whether the Thune bill will eliminate the federal tax.
Another interesting tax ramification 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 attendance is seen 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 employed individuals. 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 fully funded and many of these competitors will have used their own funds to travel and/ or pay for certain expenses while at the Olympics. Many of these out-of-pocket costs can be deductible to offset all or a portion of their related taxable income from their Olympic rewards, or endorsements they receive during the year.
Rest assured, the vast majority of the Rio Olympians are motivated primarily by their competitive nature and super-human talent, rather than pre-tax or after-tax dollars, so you can be assured that these athletes will be sure to give it their absolute all in the coming weeks. Blood, sweat, and tears will be shed primarily for lifetime bragging rights, and secondarily for after-tax financial gain.
Blake is a Tax Partner and Carlos is a Tax Intern with HCVT, a top 50 national CPA firm with deep tax expertise for high net-worth individuals including professional athletes, entertainers, and creative entrepreneurs. Each has limited Olympic potential, but they each reside in cities with deep Summer and Winter Olympic histories.
For more information, please contact Blake Christian at 435.200.9262 or firstname.lastname@example.org, or your client service team.
For more information regarding HCVT, please visit www.hcvt.com.