The fine art market is one of the most fascinating ways the ultra-rich game the system to save millions of dollars in taxes each year. To understand this you need to have basic knowledge of taxes and capital gains. The premise is that art prices are inflated by industry “insiders” and corrupt museum, studio, gallery, and government officials and sold at prices that easily cover any taxes that need to be paid. There is a big difference between what is publicly declared as the price of a piece of art and what it was actually sold for. This practice of closed prices is something synonymous in the art world.
Watch this video by Reed Media to begin to have a better grasp of how and why the game is played.
The transcript of this video by… REED MEDIA
Many masterpieces of art history of long lived outside the public view either bared in the depths of basements of museums or tucked away in the villas of the rich however unknown to most the largest art collection in the world is currently collecting dust in a Geneva Freeport. A fenced off warehouse near Geneva Airport beyond a view of the public and outside the reach of law enforcement agencies and tax authorities. Most people are unaware of how vital the role Freeport’s play in the globalnetwork of high-end art transactions wedo not even have a ballpark estimate ofthe value of goods stored in luxury freereports due to the laws protecting theirsecrecy in 2016 Deloitte estimated that1.6 trillion dollars of high net worthindividual wealth was allocated to artand by 2026 that project that number toalmost double contrary to what mostpeople think the high-end art world isnot filled with patient art aficionadoswilling to drop tens of millions ofdollars in the name of art it’s a worldfilled with mostly savvy investorsbusiness people and the money at eliteif you’re fascinated with the differenttypes of tax loopholes individuals andcompanies are able to get away with lookno further the high-end art market is anideal playing ground for tax dodgingoffshore banking and even moneylaundering if you want to stay engagedwith this channel please take a momentto LIKE and subscribe thanks so muchluxury art is useful for all matter offinancial manoeuvring but one of thebiggest reasons the wealthy elite of theworld love it so much is because it’s avery cost dense physical asset thinkabout all the things you can buy for ahundred million dollars you can get aprivate jet a yacht or maybe even somepricey real estate but these objects arehuge they have a massive physicalpresence so if you want to stash yourwealth discreetly a 200-foot mega yachtis not the most low-key approach andrunning costs and depreciation make it apretty bad investment anyways artwork issmall easy to store holds its value andcan be worth an insane amount of moneyin 19th century Switzerland andinnovation emerge that would eventuallyserve the art industry very effectivelyand today as a result there are freeports extremely secure storagefacilities offshore where valuablecommodities can be kept with the utmostdiscretion and noone can enter without an appointment asthe economies around the world becamesubstantially more connected when theinternet emerged in the late 20thcentury tax loopholes and secrecydomains acquired a much greatersignificance in the global economy forart 3-part became the physicalequivalent of a Swiss bank account theseinternational free trade zones andtax-free storage facilities around theglobe which the world’s biggest existsin Switzerland Luxembourg and Singaporeare usually exempt from tariffsvalue-added tax capital gains tax orother charges that could be levied onthe owner of the art and if that art isheld through an anonymously ownedoffshore company then it is also verylikely that the artwork will be outsideof the scope of wealth taxes and otherrules on inheritance because of itsownership is simply not declared let’slook at a comparison when you saw yourhome the paperwork details of the saleof that asset are all available to thepublic including your name and theprevious owners but when someone sellsan artwork at a Freeport or even anauction no matter how big the purchasesthe identity is typically concealed sothe paperwork might identify the workcoming from a European collection butthe buyer usually has no clue with whomhe or she is dealing with sometimessurprisingly even the auction house maynot know who the seller is so in briefyou have a market connected by a largenetwork of luxury free ports with aliquidity pool and then multi trillionsof dollars protected by secrecy anddesignated by governments around theworld as a tax shelter and to top it offexternal and international watchdogs donot regulate the art market as they dowith financial markets works of art arereally tough to value financially theydo not have a fixed value as currencydoes and its value can be purelysubjective as a result the price of artcan be inflated legitimately or throughother means such as conspiracy amongbidders at an auction so here’s wherethe art of tax scheming in the art worldbecomes very interesting collectors canreceive tax benefits by donating piecesfrom their collection to museums actingas a tax credit system offsetting thetax payable by the taxpayer this iswhere buying low end donating high isreally beneficial since the charitablededuction would take the current valueof the work into account not the amountthe collector originally paid for it soif you have a big tax bill coming up andmost billionaires do you could in theorybuy a large collection of art from ano-name artist at a really low pricedrum up some interest in this artist bylocating and paying a reputable artdealer to campaign for this new artiststhey will in turn pitch this artist -exquisite magazinehow this new artist is changing thelandscape of Modern Art once this artisthas received some notoriety by the pressbring a few pieces of art from your newcollection to an auction house for salenow here’s where the fun beginsonce the art is up for sale at theauction you will call in a few fake bidsto artificially inflate the price of theart because well that’s legal in thisworld now you’ve effectively sold theart back to yourself and you may bewondering what is this done for meoutside of losing a 2% Commission to theauction house and well you shouldn’t befeeling buyer’s remorse because now yourartworks on paper are worth upsubstantial amount of money raising thenet value of your art collectionsignificantly and the value on thispaper is legitimized by historical salesfigures at the auction where you bit upthe price yourself in reality the newvalue of this artwork would be a toughsell to other collectors so you aren’treally getting any richer but what youcan do is donate a few pieces of yourart collection to a museum as acharitable donation this means you willbe able to report a large donation tothe IRS by just giving away paintingsthat originally were worth close tonothing and with any luck the museummight name a wing after you in the endoutside of Uncle Sam this is a win-winall around went for you because you savean incredible amount in taxes a win forthe artist because they have newnotoriety in the art worldoh and for the art dealer because theyget to charge you for their services awin for the auction house we’re gonnacharge you a percentage Commission ofthe sale and it went for the museumbecause they receive free art lookingfrom the outside in all of the keyactors are incentivized to play along inthis positive feedback loop because wellthey’re better off doing so and there’snothing inherently illegal with whatthey’re doing art is weird it’sdifficult to understand the hiddenmeaning behind it but it’s moredifficult to understand their marketsand crazy high prices so why on earthwould billionaires – a significantportion or they’re not worth an artartwork is rare people expect it to keepappreciating in value it’s discrete andyou can pull off financially funnybusiness with it artwork is just anothertool billionaire is used for theaccumulation of wealth and distributionof capital worldwide an effort to ensuretheir money is working for them and notfor some governments somewhere