As if salary cap and luxury tax rules weren’t enough, NBA Franchises may be adding a new financial consideration when deliberating trades: the IRS and federal tax law. According to Jim Tankersly of the New York Times, a recent change to United States Tax Code signed into law by President Donald Trump removes traditional protection against taxation for businesses exchanging assets. Under the old code, certain businesses were exempt from capital gains tax when swapping like goods with another business entity. While usually applied to vehicles and machinery, the exemption included players traded by professional sports franchises. The revised code, part of a larger tax overhaul, limits the exemption to real estate. When professional sports teams make deals, any team perceived as receiving added value could now be taxed on that value.
That change is meant to capture more federal revenue, in order to partly offset reductions in business and personal income tax rates. It forces manufacturers, farmers and others to pay more in capital gains taxes, if they trade an asset for something more valuable. The Joint Committee on Taxation estimates the change will raise $31 billion over the next decade.
It also means that...sports franchises could now face capital gains taxes every time they exchange or trade their highly paid players.
Ripples have started among American professional leagues:
“There is no fair-market value of a baseball player. There isn’t,” said Daniel R. Halem, the chief legal officer of Major League Baseball. “I don’t really know what our clubs are going to do to address the issue...
The N.B.A. is similarly perplexed. It sent teams an email this month detailing the disruption of the trading system under the new law, but told executives it was still figuring out how to respond.
According to Tankersley, officials from these leagues hope that congress will revisit the decision, or at least provide clear guidelines on applicability and a definition of “value”. If not, the issue could get sticky, as in this example from Major League Baseball.
[T]eams value players differently, and one player might help a certain team far more than another team. A struggling club with a surplus of starting pitchers might trade one to a playoff contender in desperate need of one, in exchange for position players who could improve a struggling lineup. In that case, both teams could, reasonably, be considered to have gained value in the trade, and thus would owe taxes on it.
The article cites the Trail Blazers by name, having completed a deal that might invoke yet another taxable situation:
Basketball could be an even trickier proposition, because it taxes teams if they exceed a certain amount of total player salary for the season. This year, the Portland Trail Blazers traded a player with a modest contract in order to get under the tax threshold, saving themselves millions. The Cleveland Cavaliers made a series of trades that pushed them over the threshold. Some N.B.A. executives — who would not speak for publication — wondered if the Trail Blazers would need to pay federal tax on the money they avoided in league taxes as a result of a trade.
Tankersley’s article goes into greater detail on the history of the code and the confusion surrounding the new version.
h/t to reader @roseburgian for the find.