Olympic Medalists (Probably) Aren’t Paying All the Taxes They Owe

Senator Chuck Schumer is leading the charge to pass a tax break for U.S. Olympians who take home the gold, silver, or bronze. “After a successful and hard fought victory, it’s just not right for the U.S. to welcome these athletes home with a tax on that victory,” Senator Schumer told an audience in Lake Placid, N.Y., on Tuesday. To that end, Senator Schumer has co-sponsored a bill — the United States Appreciation for Olympians and Paralympians Act — that would amend § 74 by adding the following subsection:

(d) Exception for Olympic and Paralympic medals and prizes. 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.

The bill passed in the Senate (via unanimous consent) on July 12. Identical legislation has stalled in the House for more than a year.

A press release from Senator Schumer’s office states that under current law, U.S. medalists are subject to federal income tax on cash prizes awarded by the U.S. Olympic Committee. The committee awards $25,000 for a gold medal, $15,000 for a silver, and $10,000 for a bronze. Americans for Tax Reform — the Grover Norquist outfit that, unsurprisingly, supports this legislation — says that “[a] gold medalist from Team USA could end up facing a tax bill of $9,900 per gold medal, $5,940 per silver medal, and $3,960 per bronze medal.”

As others have noted, this is a very silly bill: of course Olympians should be taxed on their prize money, just as we all are. (Or, at least, just as all of us fortunate enough to win prize money are.) Maybe — though only maybe — § 74 should be amended so that Olympians can be eligible for the § 74(b) exemption:

(b) Exception for certain prizes and awards transferred to charities. Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if — 
 (1) the recipient was selected without any action on his part to enter the contest or proceeding;
 (2) the recipient is not required to render substantial future services as a condition to receiving the prize or award; and
 (3) the prize or award is transferred by the payor to a governmental unit or organization described in paragraph (1) or (2) of section 170(c) pursuant to a designation made by the recipient.

Section 170 (often confused with § 501(c)(3)) is the provision that allows you to claim an itemized deduction for charitable contributions to certain entities. And § 74(b) is the provision that would apply when, say, Al Gore designates his Nobel Peace Prize money to go straight to charity (in Gore’s case, to the Alliance for Climate Protection). Olympians wouldn’t be eligible for the § 74(b) exemption because they don’t satisfy the requirement in § 74(b)(1) that “the recipient was selected without any action on his part to enter the contest.” Perhaps — but only perhaps — there is an argument for allowing Olympians, like Nobel laureates, to claim a tax exemption if they designate their awards to go to charity. As it stands, Olympians can include the prize money in income, donate it to charity, and claim a deduction that (almost) offsets the effect of the inclusion. (Almost, but not quite: they still might pay a 1.188% surtax due to the Pease limitation, and might run up against the provision in § 170(b) limiting charitable contribution deductions to 50% of adjusted gross income.)

Speaking of which: Grover Norquist, instead of multiplying $25,000 by 39.6% to get a $9,900 tax on gold medalists, you might want to multiply $25,000 by 40.788% to account for Pease, which gets you a $10,197 tax on gold medalists.

To be sure, Olympic medalists might be able to offset some of their prize income by claiming training and travel costs as deductible business expenses or by claiming deductions for hobby activities. And many medalists will fall below the 39.6% bracket (which sets in when taxable income reaches $415,050 for an individual or $466,950 for married joint filers). But this is all tangential to the main point of the post: why Olympic medalists probably pay too little in income tax.

The (probable) underpayment of taxes by Olympic medalists arises from the medals themselves. Interestingly (though still tangentially), Sports Illustrated reports that:

[G]old medals will be 525 grams of silver plated with six grams of pure gold; silver medals will be 525 grams of silver; and bronze medals will be a similarly weighted mixture of copper, zinc, and tin. The street costs for the medals were roughly $600, $370, and $3.50, respectively, when Olympics medals were last distributed (at the 2014 Sochi winter games).

The resale value of an Olympic medal is far greater than the sum of the parts though. Sports memorabilia dealer Ingrid O’Neil estimates that:

[T]he most common bronze medal from the Summer Olympics should bring $5,000-$6,000, a silver $8,000 and a gold $10,000.

(As a reference point, Anthony Ervin, who won the gold in the 50-meter freestyle at the 2000 Sidney Olympics, sold his gold on eBay for $17,101 in 2004 and donated the proceeds to Indian Ocean tsunami victims.)

Treasury regulations state that if a “prize or award is not made in money but is made in goods or services, the fair market value of the goods or services is the amount to be included in income.” Treas. Reg. § 1.74–1(b). That’s the fair market value of the Olympic medal, not the street value of the constituent parts. If the University of Chicago compensates me in the form of a Monet water lily painting, I don’t report the cost of Monet’s paint and canvas (a few hundred dollars?); I report the market value of the painting (~$27 million).

There are, to be sure, some uncertain valuation issues involved, but I think it’s clear that the fair market value of an Olympic gold medal is more than zero — and more than $600. Olympic medalists should, I would think, be doing their best to estimate that amount, report it as income, and pay taxes accordingly. If the IRS determines that the fair market value is higher than what the medalist claims (and if the in-kind income hasn’t been reported on an information return), then the medalist would “have the burden of proving that the value of the prize was less than the amount determined by respondent.” Haeder v. Commissioner, 81 T.C.M. 987, 999 (2001).

Sound harsh? Yes, taxes are tough for those of us compensated in the form of impressionist artwork and precious metal. But why should Olympians play by different rules? (Because New York has the second highest number of Olympic golds and the state’s senior senator is set to become the top-ranking Democrat in the chamber?)

Of course, I can say only that Olympic medalists probably pay less than they owe because I haven’t seen their tax returns. It may be the case that Olympic medalists are underreporting their income and the IRS has chosen not to challenge them (or has resolved all of these cases nonpublicly). But it is also possible that, unbeknownst to me (and to Senator Schumer and Grover Norquist), Olympic medalists routinely report the fair market value of their medals as income and pay taxes accordingly. That would be the true Team USA spirit.