Victory can be taxing.  After the July 2024 Olympic games in Paris, there have been questions as to whether Olympic medalists can receive tax exemptions on their winnings.  Certain amendments to the Internal Revenue Code (“I.R.C.”) have allowed exemptions for prize winning-athletes who earn under a certain yearly income.[i]  This exemption will also apply to cash bonuses offered to Olympic medalists paid by the countries they represent.[ii]

Gross income, as defined by the I.R.C. § 61, is “all income from whatever source derived, including (but not limited to) . . . compensation for services . . . gross income derived from business, gains derived from dealings in property, interest, rents, royalties, [and] dividends[.]”[iii] Additionally, Commissioner v. Glenshaw Glass sets the standard that all accessions to wealth, meaning increases in a taxpayer’s economic position that are realized and a taxpayer has control over, are considered gross income and are subject to taxation as such.[iv]  However, the I.R.C. recognizes exceptions for certain accessions to wealth that can be excluded from taxable gross income, such as Olympic prize winnings as described in I.R.C. § 74(d).[v]

Generally, I.R.C. § 74, which governs the taxation of prizes and awards, considers prizes and awards part of a person’s gross income, making them taxable.[vi]  Before 2016, winnings from participation in the Olympic games, as well as any prize money received by an athlete, did not serve as a tax exemption for gross income observed by the Internal Revenue Service. Exemptions for awards were only allowed when the award was given to someone who did not act to receive it by applying or competing, when the person receiving the award does so without a conditional future obligation for receipt of that award, or when the award is sent directly to a charitable organization.[vii]  Exemptions were also given for awards received at work, such as an “Employee of the Year” award, where the employer decides how much of the award can be deducted as a business expense.[viii]

Historically, the I.R.C. has not been lenient in allowing professional athletes to claim tax exemptions under the exceptions laid out in I.R.C. § 74.[ix]  Specifically, the court in Hornung v. Comm’r. held that a professional football player could not claim a tax exemption for a car rewarded to him by Sports Magazine after being selected as the most valuable player in the Superbowl.[x] The court reasoned that Congress did not intend to observe proficiency in football to justify a tax exemption under I.R.C. § 74.[xi] Similarly, in Simmons v. U.S., the Court did not consider a $25,000.00 cash prize for winning a fishing tournament as an achievement that fell under any exceptions in I.R.C. § 74 and was not an award worthy of receiving a tax exemption.[xii] The Simmons Court reasoned that because the offer of the award for catching a specific fish was a contract between Simmons and the company, there was an obligation for Simmons to receive the award if he did in fact catch the fish.[xiii] Consequently, that award was not a gift that fell under a statutory exclusion from taxable gross income.[xiv]

Be that as it may, in October of 2016, President Obama passed the “United States Appreciation for Olympians and Paralympians Act,” which was later codified into I.R.C. § 74 as subsection (d).[xv] I.R.C. § 74 (d)(1) generally states that any money received by an Olympic competitor by the United States Olympic Committee as a reward or compensation for competition should not be included in the calculation of taxable gross income.[xvi]  However, this rule stipulates in subsection (d)(2) that the exception does not apply to taxpayers whose salary exceeds $1,000,000 for the taxable year.[xvii]  This amendment was enacted to recognize the patriotic service performed by Olympic athletes when they represent the United States during competitions.[xviii]  Additionally, the Committee behind this enactment also recognized that many athletes spend significant amounts of time training and preparing for competition but are not earning a livable wage, if any wage at all, while doing so and therefore often pursue non-athletic careers for income.[xix]  This amendment recognizes that money earned through prizes for Olympic competitions should compensate for the efforts and sacrifices made by Olympic athletes who represent the nation.

In keeping with the desire to compensate athletes for the time they spend preparing to represent the United States in competition, gold medalists are also given cash prizes in addition to their medals.  In the United States, gold medalists are awarded $38,000.[xx]  Additionally, the governing body of Track and Field events awarded $50,000.00 to gold medalists in this category for the 2024 Olympic games, and this money was to be divided evenly amongst members of relay teams.[xxi]  Although these monetary prizes sound large initially, the amounts dwindle after their division amongst team members and would reduce further if subjected to being taxed.  Although these monetary prizes provide a great cushion for Olympic athletes, many must pursue careers outside their practiced sport to make ends meet.[xxii]  Therefore, lawmakers understood that the amount athletes would receive after division and taxes would be significantly less, which helped give rise to the additional section in I.R.C. § 74 for Olympic athletes.

Considering how courts have reasoned in previous cases, the addition to the list of exceptions in I.R.C. § 74 creates a good balance concerning tax exemptions in professional athleticism. The creation of the United States Appreciation for Olympians and Paralympians Act recognizes the importance of the commitment and effort put forth by those individuals who work to represent our country.  Specifically, by contributing this tax exemption to these exemplary individuals, the I.R.C. encourages them to chase their dreams while simultaneously showcasing their patriotism without fearing a significant tax liability looming over them.  Although this tax exemption is a step in the right direction, a higher amount awarded to Olympic athletes would also help reinforce the recognition of the time and effort spent practicing to represent the nation in Olympic sports.

[i]  See Christopher Wood, Payroll Specialist Sheds Light On Olympic Athlete’s Tax Withholding Challenges in Paris 2024, Thompson Reuters, (July 26, 2024), https://tax.thomsonreuters.com/blog/payroll-specialist-sheds-light-on-olympic-athletes-tax-withholding-challenges-in-paris-2024/.

[ii]  See Mitchell S. Halpurn, Do Olympians Pay Taxes on their Medal?, Kahn, Litwan, Renza, (July 22, 2024), https://kahnlitwin.com/blogs/tax-blog/do-olympians-pay-taxes-on-their-medals.

[iii]  I.R.C. § 61 (2017).

[iv]  See C.I.R. v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).

[v]  See I.R.C. § 74(d) (2016).

[vi]  I.R.C. § 74(a) (2016).

[vii]  I.R.C. § 74(b) (2016).

[viii]  See id.

[ix]  See generally Taylor L. Green, Taxing Prizes and Awards: Proposed Amendments to Section 74 To Treat Meritorious Achievements Equitably,70 SMU L. Rev. 509 (discussing different cases where the courts have decided that professional athletes cannot use certain winnings as tax exemptions).

[x]  See Hornung v. Comm’r., 47 T.C. 428, 441 (1967).

[xi]  See id. at 439.

[xii]  See Simmons v. U.S., 308 F.2d 160, 165 (4th Cir. 1962).

[xiii]  See id. at 166.

[xiv]  See id. at 165.

[xv]  See Halpurn, supra note ii.

[xvi]  See I.R.C. § 74(a).

[xvii]  I.R.C. § 74(d).

[xviii]  See Halpurn, supra note ii.

[xix]  Id.

[xx]  See Jocelyn Brumbaugh, How Do Olympic Gold Medalists Get Paid? It Depends On What Country They’re From?, Koat Action News, (Aug. 5, 2024), https://www.koat.com/article/olympic-gold-medalist-pay-by-country/61792282.

[xxi]  See id.

[xxii]  See Halpurn, supra note ii.