PURCHASING ART : A PLOY TO DODGE TAXES?

By Atiyah Krishnan | Edited by Nisha Gokhale

More money, more problems. 

This is what the rich would have you believe. People with greater incomes are subjected to more taxes and seek to reduce it through different means. They hire tax lobbyists or tax lawyers who are well-versed in the tax code and find loopholes to save their client’s money. Real estate also forms an effective means to put off tax bills. They are influenced by the market forces of demand and supply which limit the absolute value of the asset. 

This is where fine art comes into play. Artwork is bought for its intrinsic value. Art connoisseurs want it to adorn the walls of their houses. However, those are not the only set of people who purchase fine art. Unlike other assets, valuation of paintings is based on arbitrary terms. The price of art is determined by abstract aspects like aesthetic, cultural value etc. This makes artworks a suitable instrument for evading taxes.  

Art galleries are a niche market, operated and controlled by a small group of curators. They provide a platform for artists to present their works and link them to sellers who find worth in their art pieces. Bill Gates bought a painting titled ‘Lost on the Grand Banks’ by Winslow Homer for $36 million in 1998.

When an influential personality buys a certain artist’s work, the gallerist gets an opportunity to publicize the artist. They hold private exhibitions for the said artist and get newspapers to publish articles about their artwork. The market of art caters to a closed demographic where artists build a reputation through word of mouth. Once an artist gains familiarity within the community, the prices of their works rise. It’s important to note that this rise need not be due to the rise in demand. Gallerists often tend to jack prices artificially and owe it to factors like a change in the status of an artist when they win a major prize or get mentioned exclusively in the media.

The prestige of an artist decides the worth of their paintings, including the ones that have already been sold. Once bought, the painting will have one of two fates. It will either be on display in the most fancy part of the buyer’s house or be shipped off to a free port.

A freeport is a free economic zone, usually in the form of large warehouses where goods can be stored, handled and manufactured without having to pay any custom duty. Freeports help dodge excise duty, allowing individuals to anonymously store a large number of artworks and even serve as private exhibitions for potential buyers. They enable fraud and embezzlement in the art industry. 

The buyer moves their artwork out of freeports once its price has risen, with the intention of donating it to charities. As mentioned earlier, this price boost is artificial and solely on paper. In order to actually assign the value to the painting, one needs to get it appraised. A proper appraisal is required for accurate tax deductions when it is donated. Art appraisers are individuals who determine the value of artworks for a living. Their expertise in the field gives them complete control over how they perform valuations. The process of appraisal involves referring records of past auctions and sales and much more.

Donated paintings can be written off in taxes but there is a limit to it. Depending on the kind of organization to which the donation is being made, 20% – 50% of one’s income can be written off. For instance, the limit of tax deduction for donating to a charitable trust is 20%. Even if the cost of the painting is greater than 20% of the individual’s income, the total cost of the painting cannot be written off. This is not a problem as one can stretch the amount out over a period of time and include it in tax deductions of coming years.

An individual may also choose to auction paintings instead. The income earned from auctioning is subjected to long term capital gains which is far less than the taxes they would have to pay had they sold the work.

Activities of the art industry are largely unregulated, with consumers belonging to the highest income bracket. These consumers influence the type of art that is appreciated in the market, deeply affecting artists and their views on art. There is a growing chasm between what an artist wants to create and what they have to, in order to sell it. Artworks are being used as financial instruments while the creativity is disregarded. 

How the Art Gallery System Works – How Galleries Choose Artists. (n.d.). Artbusiness.Com. Retrieved December 2, 2021, from https://www.artbusiness.com/osoquugalsys.html

David Barnett Gallery. (n.d.). How does fine art appraisal work | David Barnett Gallery. Davidbarnettgallery.Com. Retrieved December 4, 2021, from https://davidbarnettgallery.com/how-does-fine-art-appraisal-work

Making A Mark. (2017, April 13). Why art prices rise – inflation, status and market valueMakingamark.Blogspot.Com. Retrieved December 4, 2021, from https://makingamark.blogspot.com/2017/04/why-art-prices-rise.html

C. (2020, November 2). Behind Closed Doors: A Look At Freeports. Center for Art Law. Retrieved December 3, 2021, from https://itsartlaw.org/2020/11/03/behind-closed-doors-a-look-at-freeports/

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s