Art stocks are gaining popularity as a viable asset class as investors look for new ways of increasing their profit margins on investments. It is being embraced by households as a component of their personal identity. Art is perhaps, one of the only ways in which emotions and investment intersect for profit.
Is Investing in Art a Good Idea?
Investing in art certainly isn’t for everyone. Making this type of investment requires a sizable amount of money. For most art investments, you’ll need at least five figures. Returns on these investments are also not guaranteed.
On average, art provided a 10.6 percent return in 2018. This means you’d receive $1,060 for every $10,000 invested. That type of return could take years though. Additionally, it is possible for any art investment to maintain its value and not grow at all.
So, you should truly only make an investment in art if you are a collector and it is something you are passionate about. Because, when all is said and done, you may wind up just hanging it on your wall and never selling it. However, there are some ways that art stocks can help individuals decrease the amount of taxes they pay.
The Rising Popularity of Art in Reducing Taxes
Each year, many people use art to achieve billions of dollars in tax deductions. Donations to charities earn taxpayers a deduction between 20 percent to 50 percent. When donations are made to cultural institutions, it results in a deduction of around 30 percent.
That isn’t to say all pieces of art you buy will get you a tax break. Artwork which is obtained through inheritance may be subject to the inheritance tax. Additionally, gifts exceeding $14,000 in value may also be taxed. Capital gains on gifted or inherited artwork may need to be calculated using the fair market value of the piece of art at the time it was received as the original “purchase” price.
Using Free Zones and Other Regions to Reduce Taxes
Investors in art stocks and pieces of work can reduce the amount of taxes they pay by using free zones. Free zones allow for goods to be exchanged without paying VAT or customs duties. While one of the main purposes of free zones is to reduce taxes, investors must embrace the fact that each free zone has different exemptions for goods and taxes.
In Australia, for example, 100 percent tax deductions may be possible for art purchases valued at $30,000 and above. The write off for artwork was increased to $30,000, giving business owners the opportunity to reduce their tax obligations with strategically placed entities.
Those who choose to sell their artwork to buyers outside their state may be required to pay sales tax for the sale. Gallery owners are usually required to pay sales tax if the buyers are located outside the seller’s state.
One’s chances of paying taxes for art may reduce if they do not have a physical business address to sell their art from. Sales of art through the internet, however, are less likely to be taxed.
If you want to avoid sales tax and other tax-related fees when investing in art, consider using one of the free options above.
Buying Art Stocks is All About Timing
The timing of an art sale can also determine how much tax an individual pays. If you hold on to artwork for more than a year before selling it, you may have to pay a long-term capital gains tax. The tax is paid for any profit you make on the sale.
It is important to note that the Internal Revenue Service (IRS) introduced a new procedure that enables art owners to use charitable remainder trusts as vehicles for tax deferral. Charitable remainder trusts allow for the sale of assets while paying lower capital gains tax. Charitable remainder trusts are usually exempt from state and federal income taxes. A charitable deduction may be attained in the year that the art is sold.
When it comes down to it, investing in art stocks or pieces of artwork will take some initial research. Certainly, don’t jump into art for tax deductions. Look into what investments have been proven to be fruitful for others and use programs such as Masterworks to get started as an investor in the art world.
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