SUMMARY

Art collecting is a rewarding pursuit, offering both cultural enrichment and financial potential. However, understanding the associated taxes is essential whether you're buying or selling artwork. From sales tax to capital gains, various tax obligations can significantly affect the financial outcome of your transactions. To help you navigate this, we’ve compiled a comprehensive list of crucial taxes to consider when dealing with art.

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Jonas Wood, Ovitz’s Library (2013). Courtesy of the artist and Anton Kern Gallery.

Sales Tax

Sales tax must be paid in the country where the sale occurs. In the United States, sales tax varies widely from state to state; There is no sales tax in Montana, New Hampshire, and Oregon. If the artwork is shipped to another state immediately upon purchase, instead of sales tax, use tax rates apply.

Use Tax

Use tax is a counterpart to sales tax, which applies when sales tax is not collected at the point of sale. Use tax also varies widely from state to state. The rate is typically the same as the sales tax rate in your state. 

Freeports 

Some collectors store their purchases in freeport facilities to minimize tax liability, avoid sales, and use tax. However, taxes will be applied at the usual rates once the artwork leaves the freeport and is delivered to a new location. The only exception is if a collector resells directly from the freeport to another collector or party. In this case, one can avoid sales and use taxes altogether. Always consult a tax professional before using these strategies to ensure you comply with all legal requirements.

Capital Gains Tax 

Do you own artwork that no longer suits your collection? Or perhaps you inherited artwork that you wish to sell? When selling art, you may owe capital gains tax on any profit you make. Art is a collectible under U.S. tax law, which means it’s subject to a long-term capital gains tax rate of 28% rather than the standard 20% rate that applies to most other assets. Additionally, there is often a 3.8% Net Investment Income Tax (NIIT) for individuals earning above specific thresholds. This rate could bring the effective tax rate on art sales to 31.8% for high-income earners. 

This rate applies to items held for at least one year and is specific to collectibles, which include fine art, antiques, coins, and other tangible assets classified as collectibles by the IRS. If collectors must sell art from their collection, they often prefer to hold off on any sales for at least a year.

Resale Tax (outside of the United States)

Collectors in the United States do not pay resale tax. Still, if you reside in the United Kingdom or Europe, under the Resale Rights Directive, the seller must pay resale royalties to the artists and artists’ heirs when the artwork is resold. The royalties span between 4% (for artworks under €50,000) and 0.25% (for artworks over €500,000), with a maximum resale tax set at €12,500.

Value Added Tax (VAT)

Value-added tax is another tax you might have to pay if you buy artwork from countries outside the United States. Value-added tax must be paid when artworks are bought from artists, dealers, galleries, or auction houses that are VAT registered.

The VAT tax is usually integrated into the price of art by the seller, and it usually amounts to 15% to 20% of the artwork’s value. If you buy or sell art through a middleman (gallery, auction house, or dealer), you might also have to pay VAT on their commissions. To avoid paying for VAT, many collectors buy artwork from a middleman outside the E.U. and the U.K. and then pay the import fees instead.

Estate and Gift Taxes

Artworks often hold significant sentimental and monetary value, making them popular gifts or inheritances. However, gifting or bequeathing art has potential estate and gift tax implications.

For gifts, the IRS allows an annual exclusion amount (e.g., $17,000 per recipient in 2023) that can be given tax-free. If the artwork’s value exceeds this amount, you may need to file a gift tax return, although taxes might not be owed until you exceed the lifetime gift tax exemption limit.

When artwork is passed on through an estate, it is included in the total value, potentially triggering estate taxes if the estate exceeds the federal exemption threshold. To minimize these taxes, collectors may consider estate planning strategies, such as placing art in a trust or donating it to a museum.

Deductions for Art Donations

Donating artwork to a qualified institution, like a museum or university, can offer tax advantages. If you’re the artist, you can only deduct the cost of materials, not the market value. However, collectors can deduct the artwork’s fair market value if it has been held for over a year and donated to a public charity. This deduction is limited to 30% of the donor’s adjusted gross income, though it can be carried forward for up to five years.

Working with Tax Professionals

Tax regulations on art transactions are complex and vary by jurisdiction. Working with a tax professional experienced in art transactions can help you comply with all applicable tax laws and make the most tax-efficient decisions for your art investments. Proper tax planning can make a significant difference in preserving the value of your collection.

Final Thoughts

Whether you’re buying, selling, or gifting artwork, understanding the tax implications is crucial. By staying informed and working with experts, you can enjoy your collection while managing tax liabilities effectively. At novaartla.com, we believe in empowering collectors and art lovers with the knowledge they need to make informed decisions in the art world.

Julie Heffernan, Study for SP with Innards (2023).

Melvin Sokolsky, Fly High (Jump), Paris, (1965).

Alicja Kwade, abarchairisabarchairisabarchair (2018).

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