- Jessica Rinaldi/Reuters
- A tweak to the tax code as part of the new GOP tax law is causing problems for professional sports teams.
- The change makes trades of assets subject to capital gains taxes.
- This is a problem because leagues like the MLB and NBA aren’t sure how to exactly value assets like players and draft picks.
A small tweak to the tax code as part of the new Republican tax law could cause headaches for the US’s major sports leagues – and none of them are sure how to address the issue.
A new report from the New York Times’ Jim Tankersley highlighted a small shift in the tax law’s treatment of asset trades between businesses:
- Previously, the tax code exempted exchanges of “like-kind” property from capital gains taxes, or taxes on profits from an asset sale.
- So if two manufacturers traded equipment, or farmers exchanged crops, the recipient of the more valuable item wouldn’t have to pay taxes on that gain.
- For sports teams, this meant that trades were also exempt from those taxes.
- But under the new tax law, the only trades exempted from capital gains are “real” property – basically just real estate.
- So if a manufacturer trades a $1,500 piece of equipment for a $3,000 piece, the manufacturer must pay taxes on that $1,500 in increased value.
The change helped to mitigate the large cost of the tax bill’s cuts and will raise billions of dollars in revenues over the next decade, but it also leaves professional sports teams in a bind.
Determining the value of different assets in a sports trade, from players to prospects to draft picks, can be difficult.
For instance, what is the fair value of an older player on a large contract compared to two promising young players and an extra draft pick? Is a large contract really a player’s “fair value” if the player is injured and won’t be able to play for part of that contract? Is trading a big contract for future flexibility under salary cap rules valuable even if a team takes on nominally cheaper contracts in a trade?
MLB chief legal officer Daniel Harlem told the Times that there is no way to determine the exact value of player in, and the change is perplexing the league.
“I don’t really know what our clubs are going to do to address the issue,” Harlem told the Times. “We haven’t fully figured it out yet. This is a change we hope was inadvertent, and we’re going to lobby hard to get it corrected.”