The Art Market and Taxes (Blog Post #2 - Ella Marshall and Maggie Yost)

The Art Market and Taxes 1 Within the art market, there are multiple kinds of tax considerations, including sales tax, capital gains tax, and estate tax. Each of these have implications on the art market and its participants. As the art market grows and expands, understanding how these taxes will affect artists, collectors, galleries, and investors is increasingly important. The goal of this blog post is to be able to understand the different types of taxes in the art market and the implications they have. During a normal art transaction, sales tax needs to be considered. When an artwork is sold, the seller is often required to collect sales tax from the buyer, which can vary significantly depending on the jurisdiction.

In the United States, sales tax can vary depending on the state (Erskine). In Ohio specifically, sales tax is 5.5% (Erskine). In some cases, sales tax is not collected during a transaction. Sales tax might not be included if the art is seen as a cultural asset that contributes to society. Many jurisdictions or states want to encourage the production and sales of cultural art (Erskine). This cultural artwork could include culture from the local area or from countries representing a specific persons culture. Artwork could also be tax- exempt if the transaction happens through a non-profit such as a museum (Erskine). To properly make donations and 2 receive the proper deduction, the seller must be diligent about how they make these donations (Erskine). Within the IRS, there is a proper way to donate artworks (De Noia). They must make a donation at an establishment for a related use (De Noia). This would mean donating an artwork to an art museum for a display rather than to a restaurant or clothing store. Next, they need to properly substantiate the donation and determine the value of the artwork (De Noia). In some cases, only the cost of materials used can be deducted. There are further nuances within sales tax of an artwork. It is possible that the original piece is tax-exempt, but a print or copy of that piece may not be. It is important that the buyer and seller are aware of these nuances (Erskine). When an artwork is sold for a price that exceeds its original purchase cost, the seller may face capital gains tax on the profit generated from the transaction (Howard). In the United States, the Internal Revenue Service (IRS) categorizes artworks as collectibles, which usually attract a higher capital gains tax rate compared to other investment types, like stocks or bonds (Howard). For example, if you purchased an artwork from an up-and-coming artist in 1970 for $1000, but it is now worth $50,000, the difference is $49,000. This $49,000 is taxable by the IRS up to 28% (Fitzpatrick Law). Collectors need to recognize this tax obligation when thinking about selling their artworks, as it can substantially diminish their financial returns. Calculating capital gains can also be complex, especially when considering related expenses, such as restoration, framing, or transportation (Howard). These expenses can be 3 added to the purchase price to lower the taxable gain, provided they can be supported with adequate documentation (Howard). Art collectors who retain their artworks for more than one year may qualify for long term capital gains rates, offering more favorable tax treatment compared to short term gains (Howard). There are many examples of capital gains in the art world. Artworks can significantly impact estate tax planning. When someone dies, their art collection's value is included in the taxable estate (Erskine). Valuing art for tax purposes is complex due to its subjective market, influenced by trends, artist reputation, and economic conditions (Erskine). Collaborating with professional appraisers who are knowledgeable about the intricacies of the art market is vital (Erskine). Accurate documentation and appraisal are important, as the IRS may closely examine valuations, particularly for high-value collections (Erskine). Furthermore, if artworks increase significantly in value, heirs could face considerable estate tax liabilities, highlighting the importance of effective estate planning strategies (Erskine). Estate planning is very important regarding taxes. Artists must understand the tax implications of their work for effective financial management and future planning. They can benefit from deductions for studio expenses and materials, but should be aware of sales tax obligations when selling directly to consumers or galleries (Avalara). Meanwhile, galleries need to navigate sales tax collection and compliance, as well as capital gains tax for artworks in 4 inventory (Avalara). Clear policies for pricing, tax collection, and reporting can help galleries manage their tax responsibilities more effectively. Specific examples of tax evasion happen inside the Geneva Freeport. It holds the largest art collection and is a way for the ultrawealthy to avoid taxes (The Swiss Times). Art is about 40% of what is stored here (The Swiss Times). Free ports have always been a place to store assets taxfree, but when Swiss banks started to report information to tax authorities, free ports grew in popularity (The Swiss Times). As long as the items of value stay in the free ports, owners are not required to pay import taxes or customs fees (The Swiss Times). These amounts could add up to about 15% in added cost. Artworks are considered “in transit” when stored in these places, and can’t be taxed (The Swiss Times). Items can also be resold in free ports, again evading paying any taxes on the resale (The Swiss Times). This provides a discrete art sale because there is generally no paper trail (The Swiss Times). Not only does this provide a space for the ultra-wealthy to avoid taxes, but it also is a place that stolen art and antiquities can be stored 5 secretly (The Swiss Times). This is a problem within the art world that needs to be solved. Taxes have a significant influence on the art market, shaping the dynamics of buying, selling, and ownership. In the future, how can we ensure that taxes are always handled legally? How can we ensure that tax exemptions aren’t being used beyond their intended purpose? As this market continues to expand and change, it’s important for all stakeholders—artists, collectors, galleries, and investors—to stay aware of their tax responsibilities. By comprehending the complexities of sales tax, capital gains tax, and estate tax, individuals engaged in the art market can make informed decisions that not only meet legal obligations but also enhance their financial outcomes. Effective tax planning is crucial for navigating the intricacies of this unique market, ensuring that art remains both a passion and a sound investment. References 6 Corliss, Bryan. “The Art of Sales Tax Compliance for Artists, Writers, and Artisans.” Avalara, Inc., Avalara, 7 Oct. 2023, www.avalara.com/blog/en/north-america/ 2022/03/sales-tax-compliance-for-artists-artisans-and-writers.html. “Creativity in Art -- but Not in Charitable Donations of Artwork.” EisnerAmper, www.eisneramper.com/insights/tax/donations-artwork-irs-1223/. Accessed 20 Nov. 2024. Ebneter, Catherine. “Unlocking the Secrets of the Geneva Freeport: A Haven for Priceless Art and Tax Evasion.” The Swiss Times, 27 July 2023, theswisstimes.ch/ unlocking-the-secrets-of-the-geneva-freeport-a-haven-for-priceless-art-and-taxevasion/#:~:text=Inside, several rooms follow specific,with biometric readers granting access. Gleckman, Howard. “Capital Gains Taxes Are Hurting the Art Market, but Not How You Think.” Forbes, Forbes Magazine, 4 June 2024, www.forbes.com/sites/. howardgleckman/2024/06/03/capital-gains-taxes-are-hurting-the-fine-artmarket-but-how-you-think/. Matthew F. Erskine, JD. “Avoiding Taxes on the Sale or Gifting of Art.” Forbes, Forbes Magazine, 20 Feb. 2024, www.forbes.com/sites/matthewerskine/2023/04/24/ avoiding-taxes-on-the-sale-or-gifting-of-art/. Matthew F. Erskine, JD. “Unraveling the Income Taxation of Art.” Forbes, Forbes 7 Magazine, 20 Oct. 2023, www.forbes.com/sites/matthewerskine/2023/10/19/ unraveling-the-income-taxation-of-art/.