Football GOAT Tom Brady reportedly was paid $30 million for appearing in commercials and serving as an ambassador for the now-bankrupt FTX. That stock is currently pretty much worthless. However, worse for Brady is that he would have to pay federal and maybe state income tax on that $30 million. He is not alone in this debacle. There were many other top stars that also appeared in the commercials, as did Brady’s ex-wife Gisele Bündchen.
The tax on that $30 million would be as earned income (but this might depend on how his tax structure is organized). If there is an eventual loss on the FTX shares, it likely would be as a capital loss which is limited to other capital gains plus $3,000 per year, further trashing his pocketbook.
Getting paid in stock is not that unusual. As far back as the late 1940s and early 1950s, Bing Crosby appeared in commercials for Minute Maid Frozen Orange Juice, getting his payment in stock, making him one of the wealthiest people in the United States.
There are many instances where plummeting stock values cause further losses than just the loss on the stock. Others that come to mind is when Jack Welch was getting divorced from his wife Jane. When they split up, his GE stock was worth about a billion dollars. When the divorce was settled, its value plummeted to much less than half of that. If his settlement was based on the values when they split up, he would effectively be broke. That wasn’t the situation, so presumably, they reached a workable agreement.
Also, when Ted Turner sold his lifelong creation of CNN, he received about $7 billion in what became AOL stock. A few years later, that stock dropped to about a billion dollars. This didn’t leave him destitute, but it shattered the unbelievable wealth he created by building CNN.
One other story is the many employees that received incentive stock options and exercised them and held on to the shares, causing an alternative minimum tax (AMT). By holding the shares rather than selling them immediately, they wanted to create a holding period greater than one year to qualify any sales for long-term capital gains. There are many instances where those shares plunged during that year to become worth much less than the AMT tax bill.
A takeaway is that nothing beats cash. Payments with stock, no matter how much they are inflated to entice the transaction, can have the values drop considerably and sometimes precipitously. In many cases, those drops can be greater than the tax bills making the recipient worth much less than when they started. Many of these transactions are done to reduce the immediate tax or create a situation where the tax deferral would eventually be paid at lower tax rates. These might be good tax strategies but not necessarily good overall financial strategies.
My advice is to not let taxes drive the transaction but consider the cash in your pocket.
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