Show Me The Crypto: Risks and Rewards of Contracting Athlete Salaries in Cryptocurrency

Over the past several years, cryptocurrency has taken the world by storm - from bitcoin, to dogecoin, and everything in between, cryptocurrency is becoming a part of personal finance and business transaction for millions around the world. To that end, cryptocurrency has become an intriguing element - or perhaps a complication - in the the sports business, finance, and law realms. Notably, many professional athletes across the major American sports leagues have requested, and some have successfully contracted, that their salary be paid in a particular cryptocurrency.

For example, NFL tackle Russel Okung famously tweeted, “Pay me in Bitcoin” in 2019. It appears his wish has been granted by the Carolina Panthers recently. Well… Technically, Okung was not paid directly in bitcoin. Instead, he personally converted half of his salary (around $13 million) to the cryptocurrency through an outside company that owned an exchange system allowing conversion. The company announced a paycheck conversion program for athletes, allowing many to do the same. Interestingly, when Okung converted about half of his salary to bitcoin, the cryptocurrency was worth about $27,318. Bitcoin’s price has nearly doubled at times since then, and if you are to include these crypto gains in his salary, it would make him one of the highest paid offensive linemen in the sport.

In November of 2021, NFL wide receiver Odell Beckham Jr. announced that he would be receiving the entirety of his contract with the Los Angeles Rams in Bitcoin. Beckham teamed up with Square Inc.’s CashApp to make the arrangement happen, . He also announced at the same time that he was giving away $1 million in the cryptocurrency to his followers on Twitter. Polarizing NFL star Aaron Rodgers also partnered with Cash App in October of 2021, taking just a portion of his salary in Bitcoin. Rodgers also gave away $1 million in Bitcoin to his Twitter followers upon the announcement, a clear effort by Cash App and crypto companies to increase the access to crypto for sports fans and athletes alike. Even rookie quarterback Trevor Lawrence joined the crypto-craze. When Lawrence was drafted first overall in the NFL draft, the young talent joined forces with investment app Blockfolio, placing his signing bonus into a cryptocurrency investment account - reportedly ending up with a mixture of Bitcoin, Ethereum, and Solana.

Meanwhile, NBA guard Spencer Dinwiddie is the first basketball star to “tokenize” his contract through extensive planning by his legal team. In essence, Dinwiddie will tokenize his three-year, $34.36 million contract, theoretically collecting its value up front. To do this, Dinwiddie would sell 90 of these tokens for $150,000 each to investors, which will then become tradeable, as a digital security. This security would pay out interest on a monthly basis, and fully pay out in 2023 when it matures. Put another way, Dinwiddie is essentially claiming half of his three-year contract salary up front as a sort of loan, paid back to investors in the following years. This process of issuing blockchain-based tokenized security backed by his contract was a point of contention with the league, but after months of negotiations - including discussions over what the opt-out clause in his contract for a third year meant for the plan - it appears the league relented. It’s possible that Dinwiddie has opened the door for other athletes to structure and issue their own debt instruments in digital token form, the size of their contracts making it simpler to bootstrap liquidity and interest using these processes.

Further, some professional teams have explicitly adopted cryptocurrency with open arms, such as the NBA’s Sacramento Kings. The team has accepted Bitcoin for merchandise and ticket purchases from fans since 2014, but in April of 2021, the Kings Chairman, CEO, and Governor - Vivek Ranadive - announced that all Kings players (in addition to coaches, stadium staff, and more) would have the option to be paid their salary, in part or in full, in Bitcoin. Seemingly, the Sacramento Kings have entered the crypto-investing sphere, holding their own shares of the cryptocurrency in their own portfolio - coming in and going out, tracking the market’s rise and fall. Similarly, in early 2018, Harunustaspor, a Turkish football club, became the world’s first football team to purchase a player using Bitcoin. The player involved in the transaction, 22-year-old Omar Faruk Kiroglu, also received 0.0524 Bitcoin (£385) as part of the deal with Harunustaspor.

Some football clubs around the world are even using crypto-tokens to let fans influence their favorite club. Chiliz, a cryptocurrency and social platform, offers fan engagement tokens focused on sports. Ownership in the crypto-token gives fans the ability to vote on decisions such as whom the football club plays during “friendlies”. The voting power on the platform does not extend to institutional or corporate governance decisions which could have third-party-ownership implications that may be against international or domestic regulations, but the crypto-token nonetheless has inherent value to be bought and sold, drives fan engagement, and increases the relationship between sports club and cryptocurrency worldwide.

Ultimately, it appears that there are three key avenues that a team and player may take when contracting that part (or the whole) of a player’s salary will be paid in bitcoin: a) a professional sports team owns their own shares of a cryptocurrency in reserve, paying out to players as the contractual obligations come (putting the risk, but also potential benefit on the team); b) a team purchases a particular cryptocurrency at the time a payment to a player is due and immediately transfers it to them; or c) a player is paid in normal currency, and their currency is then independently transferred and converted into a cryptocurrency of their choice. Each of these arrangements comes with their own set of risks, benefits, and complications.

Naturally, there are some benefits and advantages to a professional athlete receiving part, or the entirety, of their contractual salary in cryptocurrency such as efficiency, financial liberation, flexible salary options, potential for growth, and more. First, on a very basic level, a salary paid in bitcoin may theoretically rise in the time after payment, allowing for incredible profits beyond what was promised in the contract with the team, with no loss to them. This rise also applies to a team if they were to have their own wallet of cryptocurrency in reserve - it is about allocation of risk. Take Bitcoin as an example: The value of a Bitcoin was about $900 by the end of 2016, but the value today is around $46,700.

Bitcoin may be an outlier, but several different cryptocurrencies have seen substantial growth over the past few years. Next, cryptocurrency transactions are immediate. This leads to more efficient and cost-effective transfers, cutting out the bank and the administrative delays that may come with bank involvement. This is particularly helpful in international payments, as cryptocurrencies are borderless. Cutting out the bank, and an athlete being paid in cryptocurrency essentially being their own bank, allows the player to manage their own assets to their heart’s content - no restrictions, no entity waiting to freeze your account, and no waiting on checks to clear. Further, payment in cryptocurrency increases transparency and identity protection. For example, blockchain transfer generally creates an immutable, transparent record of the salary payments that have taken place - protecting both parties in the event of a dispute as long as these records are properly maintained and stored. While you may not be 100% anonymous or untraceable, worries typically associated with credit card use and identity theft are lessened dramatically. You can even go so far as to send payments while keeping your identity hidden, as long as you follow responsible security practices. Finally, as noted, if a player uses a contractual system of debt instruments in token forms like Dinwiddie, this may allow a player to collect a larger portion of their multi-year salary up front, with almost a sort of quasi-annuity for the length of the player’s contract being sold in crypto form.

All that being said, there are significant negatives, and potential risks, associated with contracting a player’s salary to be paid in cryptocurrency. For starters, it is important to remember that cryptocurrencies can be incredibly volatile, and their value may rise and fall sharply from day to day. If a player, or team, has a significant holding of a cryptocurrency that depreciates, a significant portion of their net worth may be affected. Cryptocurrencies like bitcoin are known to have drastic swings in price making them much more risky than regular transactional currency. So it may be a good idea to make sure you're only receiving a part of your salary in crypto or to consider selling some part of it immediately upon receiving it. On the other hand, you might choose to hold onto the currency if you know about crypto trading and are expecting your crypto assets to appreciate.

Further, unfortunately, cryptocurrency crime is a danger. Things like hacking and scams aren’t uncommon, and if your account gets hacked or you fall victim to a scam or some other crypto-based crime, your money is gone for good — there is no FDIC insurance, nor is there a fraud protection number you can call, nor a bank or credit card company that can cancel a transaction. Finally, there certainly is a learning curve in the crypto-sphere when it comes to the market, the technology involved, and even the simple capability of owning crypto. Cryptocurrency isn’t regulated by the Securities and Exchange Commission, it isn’t traded on the stock market, it can’t be bought or sold directly in ETFs, and isn’t traded on standard currency exchanges. In order to receive payment in cryptocurrency, you’ll have to open an account and a digital wallet on a special exchange. All of this may require special advising and legal help.

Additionally, there are tax considerations that must be taken into account when advising a professional athlete client on contracting their salary in cryptocurrency.When it comes to taxation on crypto salary, the IRS states that you will need to determine the difference between the value of the crypto at time of receipt, and how much you sell it for; you should then report this number on your taxes when you sell the currency. Many people are unclear on how crypto taxes work and end up not declaring crypto income. However, the IRS is calling for stricter compliance with crypto reporting requirements. One of the challenges with filing these returns is that you may not always remember the fair market value of the crypto you received, so keeping diligent data tracking the market, and recording your gains and losses as they happen, is crucial. However, you’re not done there! If you think your tax returns are sorted once you declare the cryptocurrency income you received, think again.

As far as the IRS is concerned, bitcoin and other cryptocurrencies fall into the category of “property.” This essentially means that when you sell cryptocurrencies, you have to pay capital gains on any profit that you make. If you have held the crypto for less than a year, you’ll have to pay short-term capital gains tax on the profits. This profit gets added to your total taxable income, and the amount you have to pay in taxes will depend on the tax bracket you belong to. If you hold crypto for more than a year, you’ll end up paying long-term capital gains tax, which can amount to as much as 20% of the profit. On the other hand, don’t forget that if you sell crypto at a loss, you can write off your losses to reduce your taxable income and therefore your tax burden. So don’t forget to keep an account of your losses and include them when you file your returns. Receiving a part of your income in cryptocurrency can feel extremely liberating, as well as efficient and cost-effective. However, there also comes with it a significant risk, and various tax considerations to take into account. Advising a professional athlete on whether they should request some (or the entirety) of their salary from their professional team to be paid in cryptocurrency is certainly a case-by-case question, considering the various factors as outlined above, and should not be taken lightly as crypto seems here to stay.

Jason Re, The George Washington University Law School 3L

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