every year rich people use art to avoid billions of dollars in taxes in the United States how well if you're a billionaire looking to minimize your tax burden prepare for some life hacks and if you're anyone else prepare to be astonished and possibly nauseated by what happens when tax deductions are combined with the government's failure to regulate a market we all know art is a commercial product just like toothbrushes cars or art assignment t-shirts and most art purchases are straightforward in the u.s. you buy an artwork and you pay whatever it costs plus the state's sales tax if you're buying out of state then sales tax isn't charged but in most cases you're supposed to pay a use tax to whichever state you receive it in in 2017 there were 60 3.7 billion dollars in total art sales globally and that's not because the 7 billion of us here on earth each bought $9 artworks although that is a nice thought most of this money is spent by extremely high net worth individuals who buy art from the primary market such as galleries where works are sold for the first time and also the secondary market like auction houses that resell works at increasingly unbelievable prices seriously last year at this admittedly astounding Leonardo da Vinci painting sold at auction for 450 point three million dollars and this painting by Peter dog who is well-regarded in art circles but many people have never heard of sold for twenty eight point eight million dollars okay so let's imagine two scenarios scenario one you're a wealthy collector from New York who actually likes art you buy a painting from the primary market for 1 million dollars you take the sales tax hit of about eighty eight thousand dollars and hang it in your home you enjoy it greatly for many years while the value of the painting steadily creeps upward thanks partly to your good luck and/or good eye for art and also partly due to the support of the artist gallery which works hard to get the artists work shown in museums and also increases prices through sales and strategic auctions all the while the art museum you support has been courting you and has let you know that they would be happy to take this work off your hands should you wish your painting to join their collection and 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 museum and claim a charitable income tax deduction equal to the works current fair market value you hire a qualified independent appraiser who researches sales records and provides you with certified documents that say your painting is now worth five million dollars 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 thirty percent of your income so if you make 17 million dollars a year and you donate the painting your taxable income goes down to 12 million dollars a year but say you make for instance a paltry 3.3 million dollars a year you can only deduct 30 percent 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 label next to the painting when they display it which is nice at the end of it all you've saved at least around 1.75 million in taxes a pretty good return on your million dollar investment and the museum is able to share a new artwork with the community which is nice since art prices are so high museums can't afford to buy it directly anymore scenario two is that you're a wealthy person from New York who doesn't actually like art that much but you've realized its investment potential you buy a 1 million dollar painting and you don't care about having it in your home so you ship it directly to a Freeport which are giant climate-controlled warehouses and 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 next to all the other lonely caged luxury goods and you keep earning money while the value of the artwork increases for the same reasons as before plus maybe you loaned it out to museums a few times which bolsters its exhibition history and makes it more theoretically valuable after 10 years you get it appraised you learn of its five million dollar 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 client to take it off your hands directly maybe that client even has art stored at the same Freeport 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 lower than it would be on income or you decide to take the painting to auction at which point you have to 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 it all or it could sell for anywhere between its reserve price the minimum price they've agreed with you they 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 artists work bid the price up or maybe galleries buy works through proxies to maintain the value of other works we don't really know but we do know that these results are reflected in future appraised values which are then used to determine other collectors deductions and again the profit you make from the auction is taxed at that lower than income capital gains rate 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 when you 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 system to save a fortune in taxes as for how I feel about all this we don't talk about the art market on this channel very much for a reason for me it's the least interesting part of 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 pigment mixed 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 it to meet the expectations created by the extraordinary number that's floating around in its ether these market conditions are fantastic for uber wealthy collectors for a very small number of artists anointed as good bets and only a handful of mega major conglomerate galleries emerging and mid to your galleries who might actually be focusing on cultivating young or under-recognized talent and thinking outside of market forces about what makes for good art in general don't have access to these collectors and very many good artists are not represented by galleries and can't even approach this level of the art world museums do benefit from being supported by the wealthy and being given works from their collections but museums also find themselves in a terrible bind as the deductions that fuel donations have inflated art prices way beyond their reach and they also run the serious risk of 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 that have nothing to do with their market interests and there is of course lots of great art happening around the world that is completely unrelated to free ports and auction houses but this is a reality we must grapple with as arts role as financial capital has become more and more influential it's bleeding out to affect its life as 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 there are 1.2 million artworks currently in 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.