Bloomberg Tax
Nov. 7, 2022, 9:45 AM

How Digital Assets Have Infiltrated the Wide World of Sports

Nik Fahrer
Nik Fahrer

If you’re like me, and your fantasy football team is already mathematically eliminated from the playoffs, then you’re probably glad this time of year offers many opportunities to enjoy the world of sports. How about a quick trivia game to see if you can identify three ways the sports world and digital assets are becoming more synonymous than LeBron James and G.O.A.T. talk?

Trivia Question 1

The New York Yankees, Aaron Rodgers, and Klay Thompson all have (at least) one thing in common. What is it?

If you guessed that each have accepted cryptocurrency in lieu of US dollars (USD) for salaries, you’re right. Yankees employees can elect to have a portion of their salary converted to bitcoin through their partnership with NYDIG. Aaron Rodgers of the Green Bay Packers and Klay Thompson of the Golden State Warriors both partnered with Cash App to accept a portion of their salaries in bitcoin. NYDIG recently released a report that found 36% of employees under age 30 are interested in getting paid in bitcoin and 31% of employees between 30 and 44 are also interested.

It’s important for advisers to be familiar with the Fair Labor Standards Act when their clients consider offering crypto payments in lieu of US dollars for wages. Some pieces of the FLSA may require extra consideration for compliance, and clients should consult legal counsel.

Some items clients may want to discuss with legal counsel include:

  • FLSA requires wages to be paid in “cash or negotiable instrument payable at par.” Crypto isn’t considered cash or a negotiable instrument payable at par. Yankees employees, Aaron Rodgers, and Klay Thompson all partnered with a third party so that their salaries were paid in USD and then immediately converted to bitcoin.
  • For hourly employees, given crypto’s volatility, ensuring that minimum wage requirements are met becomes more challenging.
  • FLSA doesn’t specifically require bonuses or commissions to be paid in “cash or negotiable instrument payable at par.”

Trivia Question 2

Three major professional sports franchises have all accepted crypto as payment for tickets and/or team merchandise. Which three?

It’s the Dallas Mavericks, San Jose Sharks, and Oakland Athletics. Forrester Consulting found that up to 40% of customers who pay with crypto using BitPay are new customers to the business, and the purchase amounts were more than twice the amount of credit card purchases.

Advisers should familiarize themselves with the following to accurately counsel their crypto-interested clients:

Risk of Volatility: Cryptocurrencies are generally volatile assets, but not all of them are. When accepting crypto as payment for goods or services, volatility risks can be reduced by accepting fiat-backed stablecoins or implementing a conversion strategy that converts the crypto to USD or a stablecoin within a short time. Note that certain algorithmic stablecoins can carry more risk than fiat-backed stablecoins.

Lack of Controls: Consider how clients will custody the crypto assets.

  • If the client chooses to self-custody the crypto, how will they store and protect their keypair? Will they require multiple signatures to approve a transaction? Would a third-party custodian provide an independent proof of reserves report?
  • How will the client perform reconciliation and roll forward controls, including identifying which general ledger accounts will be impacted? It’s best practice to report crypto as a long lived intangible subject to impairment; however, a recent Financial Accounting Standards Board vote suggests that this could be changing to reporting crypto assets at fair value.

Environmental, Social, Governmental Concerns: Does accepting crypto as payment align with your client’s goals and ESG policy? It’s well documented that cryptocurrency raises environmental concerns; however, the recent trend away from proof of work to proof of stake is reducing this concern.

Know-Your-Customer Compliance: KYC allows businesses to know who they are doing business with and reduces the chance of working with risky clients. KYC is also a legal requirement to comply with anti-money laundering laws. Most cryptos are pseudo-anonymous and can make it difficult to identify who you’re working with; however, there are vendors and data providers that can help with this process.

Trivia Question 3

Cristiano Ronaldo and two major professional sports leagues have all independently issued their own digital collectibles or non-fungible tokens. Can you guess the two leagues?

If you guessed the NFL and NBA, you’re right. NFTs are notable for one of their use cases as profile pictures, but the NBA, NFL, and Cristiano Ronaldo all made a move to tokenize their collectibles. Instead of buying tangible trading cards, think of this as buying digital trading cards that are stored as a data record in a blockchain database. The Boston Consulting Group has estimated that the tokenization of global illiquid assets will be a $16 trillion business opportunity by 2030.

Familiarity with the mechanics of NFTs is a good start for advisers. I learn best from experience, so I encourage advisers to create a wallet and purchase an NFT of their own. This is not financial advice, and the goal of purchasing the NFT should be educational with no expectation for return on investment. MetaMask is a commonly used wallet, and OpenSea is one of the most liquid NFT marketplaces available. You can even fund your wallet with a credit card.

Advisers can help clients understand the tax consequences of digital collectibles by communicating that NFTs held by an investor for longer than a year are subject to collectible tax rates, while collectibles held in inventory in the normal course of business would be ordinary income no matter the holding period. Advisers also can direct clients to legal counsel to help them understand the licenses and copyright risks associated with NFTs. You may even point your client to free, public licenses designed specifically for NFTs and inspired by the Creative Commons.

Digital assets have infiltrated the wide world of sports, so it’s no surprise that they’re finding their way into other industries as well. Just like it was only a matter of time for the Chicago Cubs to break their curse with a World Series win in 2016, it may only be a matter of time until digital assets make their way into more businesses and become a part of everyday life.

By the way, if you answered all three trivia questions in this article correctly, then I’d love to know your pick for the Super Bowl.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Nik Fahrer serves as a national tax senior manager in FORVIS’ National Tax Professional Services Group, where he helps to implement and support the firm’s digital asset and growth initiatives.

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