[MUSIC PLAYING] 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 US, you buy an artwork. And you pay whatever it costs,
plus the state sales tax. If you're buying out-of-state,
then sales tax isn't charged. But in most cases,
you're supposed to pay use tax to whichever
state you receive it in. In 2017, there were $63.7
billion in total art sales globally. And that's not because the 7
billion of us here on Earth each bought $9.00 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 it 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 $450.3 million. And this painting
by Peter Doig, who is well-regarded in art
circles, but many people have never heard of,
sold for $28.8 million. OK, so let's imagine
two scenarios. Scenario one. You are a wealthy
collector from New York who actually likes art. You buy a painting from the
primary market for $1 million. You take the sales tax
hit of about $88,000, 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's gallery, which works hard to
get the artist's 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 work's
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 $5 million. 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 30% of your income. So if you make
$17 million a year and you donate the painting,
your taxable income goes down to $12 million a year. But say you make, for instance,
a paltry $3.3 million a year. You can only deduct 30% 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 $1 million 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 it's
investment potential. You buy a $1 million painting. And you don't care about
having it in your home. So you ship it directly
to a free port, which are giant
climate-controlled warehouses in 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 loan 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. And you learn of its
$5 million 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 free port. 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 at 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
artist's 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? [VOMITING] 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-tier 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. Like our show? Subscribe. Really like our show? Support us on Patreon. Special thanks to all of
our patrons, especially Indianapolis Homes Realty. [MUSIC PLAYING]
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