It’s tax season in the United States, and the art market is one of the many ways rich people game the system to save billions of dollars in taxes each year. Here’s how it’s done.
Few videos explain better how the modern art market is a tool for the rich to pay less and less taxes and become more rich. They don´t care about the artist, the art, the museums, or you or I. It is a game that has been designed by them and for them. Learn how you cheated time and time again and hopefully you can start to make change.
Every year, rich people use artto avoid billions of dollars in taxes in the United States.How?Well, if you’re a billionaire lookingto minimize your tax burden, prepare for some life hacks.And if you’re anyone else, prepareto be astonished and possibly nauseatedby what happens when tax deductions are combinedwith the government’s failure to regulate a market.We all know art is a commercial product, justlike toothbrushes, cars, or “Art Assignment” t-shirts.And most art purchases are straightforward.In the US, you buy an artwork.And you pay whatever it costs, plus the state sales tax.If you’re buying out-of-state, then sales tax isn’t charged.But in most cases, you’re supposedto pay use tax to whichever state you receive it in.In 2017, there were $63.7 billion in total art salesglobally.And that’s not because the 7 billion of us here on Eartheach bought $9.00 artworks, although that is a nicethought.Most of this money is spent by extremely high net worthindividuals, who buy art from the primary market,such as galleries, where it worksare sold for the first time.And also the secondary market, like auction houses,that resell works at increasingly unbelievableprices.Seriously, last year at this admittedly astounding Leonardoda Vinci painting sold at auction for $450.3 million.And this painting by Peter Doig, whois well-regarded in art circles, but many peoplehave never heard of, sold for $28.8 million.OK, so let’s imagine two scenarios.Scenario one.You are a wealthy collector from New Yorkwho actually likes art.You buy a painting from the primary market for $1 million.You take the sales tax hit of about $88,000,and hang it in your home.You enjoy it greatly for many years,while the value of the painting steadily creeps upward, thankspartly to your good luck and/or good eye for art.And also partly due to the support of the artist’sgallery, which works hard to get the artist’s work shownin museums, and also increases pricesthrough sales and strategic auctions.All the while, the art museum you supporthas been courting you.And has let you know that they wouldbe happy to take this work off your hands,should you wish your painting to join their collectionand reach a wider audience.This sounds pretty good.And since you’ve owned the painting for more than a year,you can donate the painting to the museumand claim a charitable income taxdeduction equal to the work’s current fair market value.You hire a qualified independent appraiserwho researches sales records and provides youwith certified documents that say your painting is nowworth $5 million.Cool.You get advice from your accountants,because you have more than one.And they tell you that if you give the painting to a museum,you can deduct its appraised value from your taxable income,as long as the deduction is less than 30% of your income.So if you make $17 million a yearand you donate the painting, your taxable incomegoes down to $12 million a year.But say you make, for instance, a paltry $3.3 million a year.You can only deduct 30% of that.But fear not.You can spread the tax deduction over five years.So you let the museum know you’d like to give it to them.And they say, “Thanks!”And put your name on the wall labelnext to the painting when they display it, which is nice.At the end of it all, you’ve savedat least around $1.75 million in taxes, a pretty good returnon your $1 million investment.And the museum is able to share a new artworkwith the community, which is nice,since art prices are so high museums can’t affordto buy it directly anymore.Scenario two is that you’re a wealthy personfrom New York who doesn’t actually like art that much.But you’ve realized it’s investment potential.You buy a $1 million painting.And you don’t care about having it in your home.So you ship it directly to a free port,which are giant climate-controlled warehousesin tax-free zones.As long as it’s there, you don’t have to pay tax on it.The art stays safe in the dark, huddled nextto all the other lonely caged luxury goods.And you keep earning money, while the value of the artworkincreases for the same reasons as before.Plus, maybe you loan it out to museums a few times,which bolsters its exhibition historyand makes it more theoretically valuable.After 10 years, you get it appraised.And you learn of its $5 million valuation.”All right,” you say.”Let’s try to sell this.”You talk to the dealer who sold it to you.And maybe they can convince another clientto take it off your hands directly.Maybe that client even has art stored at the same free port.And they broker a deal between the two of you,where the art changes theoretical hands,but never actually moves out of the free port.Nobody pays sales tax.You’ve made a sweet profit.And the money you made is taxed as capital gains,which means your tax rate is lowerthan it would be on income.Or you decide to take the paintingto auction, at which point you haveto take the sales tax hit you avoided before,and also pay fees to the auction house.It goes up for sale.And because an appraised value isn’t its actual value,it could not sell at all.Or it could sell for anywhere between its reserve price–the minimum price they’ve agreed with youthey will sell it for–and who knows how much.Because auctions aren’t regulated,they’re famously subject to manipulation.Maybe other collectors of that artist’s work bid the price up.Or maybe galleries buy works through proxies to maintainthe value of other works.We don’t really know.But we do know that these results are reflectedin future appraised values, whichare then used to determine other collectors’ deductions.And again, the profit you make from the auctionis taxed at that lower-than-income capital gainsrate.Both of these collectors are taking risks.There is no guarantee the art you buy will increase in value.And there’s also a possibility you won’t find a buyer whenyou want to sell the work.But the truth is this.The number of billionaires in the world is rising.And an increasing number of them are gaming the art systemto save a fortune in taxes.As for how I feel about all this?[VOMITING]We don’t talk about the art marketon this channel very much for a reason.For me, it’s the least interesting partof the whole art endeavor.But it’s what media outlets love to report on.And heck, you’re still watching.Art is a commodity.But it’s not merely a commodity.It has a monetary value that can sometimes,but not always, be quantified.But it also has another kind of value that is less measurable.When a huge number gets attached to an artwork,you might look at it and think, whoa.That must be a really important painting.I better look closely and figure out why.But most of the time you quickly move on to, whoa.There’s no way this application of pigmentmixed with oil on fabric, stretched over a wooden frame,can live up to this kind of evaluation.It can still be a great painting.But it becomes increasingly difficult for itto meet the expectations created by the extraordinary numberthat’s floating around in its ether.These market conditions are fantasticfor uber-wealthy collectors, for a very small numberof artists anointed as good bets, and onlya handful of mega-major conglomerate galleries.Emerging and mid-tier galleries–who might actually be focusing on cultivating youngor under-recognized talent, and thinking outside of marketforces about what makes for good art–in general don’t have access to these collectors.And very many good artists are not represented by galleriesand can’t even approach this level of the art world.Museums do benefit from being supported by the wealthyand being given works from their collections.But museums also find themselves in a terrible bind,as the deductions that fuel donations have inflated artprices way beyond their reach.And they also run the serious riskof reflecting only the tastes of their donors and trustees,rather than the purported best of what’s actually around.There is some trickle down effect,where wealthy collectors fund nonprofit arts initiatives thathave nothing to do with their market interests.And there is of course lots of great art happeningaround the world that is completelyunrelated to free ports and auction houses.But this is a reality we must grapple with.As arts role as financial capitalhas become more and more influential,it’s bleeding out to affect its lifeas social and cultural capital.It’s affecting what kind of art gets made, shown,and canonized in museums.I mean, it’s been reported that thereare 1.2 million artworks currentlyin a dark locked free port in Geneva, Switzerland.It’s hard to see who benefits from this,except for the richest people in the world.And the downside of this system is becoming,and will continue to become, increasingly apparent.Like our show?Subscribe.Really like our show?Support us on Patreon.Special thanks to all of our patrons, especiallyIndianapolis Homes Realty.