Trading players among teams is a common practice in the world of professional sports. However, the new tax law may cause surprising ramifications on the taxation of player trading. According to the IRS, the trade that takes place is actually a trade of contracts, which is recorded for tax purposes as a like-kind exchange.
Effective December 31, 2017, the new tax reform act eliminates the exemption for like-kind exchanges except for real property (i.e., land or buildings). This means that taxpayers can no longer postpone paying taxes on the gain of sale unless the proceeds are reinvested into similar, real property. Now, the trading teams must recognize a gain or loss for federal tax purposes, causing teams to pay more in taxes.
The elimination of the exemption could lead to meticulous consideration of the valuation of each player’s contract in order to clearly define the gain or loss to report to the IRS. While taxation is only one factor in player trading, the higher costs could lead to fewer overall trades, higher ticket prices and lower salaries for the players and coaching staff. However, the exact effects are uncertain at this time because tax reform changes are still unpredictable.
To learn more about tax reform and how it will impact you or your business, contact your Warren Averett Advisor or visit our tax reform resource page.