Wednesday, May 14, 2014
For decades, Congress has treated artists and art collectors differently for tax purposes. Lawyers who represent artists or collectors should be aware of how tax rules affect artists and collectors differently.
For example, when a work of art is sold, it can be classified as either ordinary income property or capital gain collectible property. If a collector holds the artwork for more than one year, it is typically a capital gain collectible property, gain on the sale of which is subject to a tax of 31.8 percent. Gain from the sale of art that is ordinary income property is taxed at a maximum rate of 39.6 percent.
There is almost no tax incentive for an artist to donate their works to charity during an artist’s life. An artist’s charitable deduction is limited to the basis in the work of art—the cost of the materials. However, if the artist makes the donation at his or her death, the artist’s estate will receive an estate tax charitable contribution deduction of 100 percent of the full market value of the work.
When an artist creates a work of art, they also create a copyright in the work. Copyright law treats a work of art and the related copyright as two separate property interests, yet our tax laws have treated works of art and the copyrights as two interests in the same property. Furthermore, in certain cases, it may be possible for an artist or an artist or collector to do a tax-free exchange of art under Section 1031.
As the above examples illustrate, the tax rules applicable to artists and collectors are surprising and have differing results. Understanding the rules can help mitigate some of the unfairness that may be experienced by the artist and ensure the best result for heirs and the art community.
See Bradford Cohen, Sara Johnson, and Charles Kolstad, Estate and Tax Guidance for Artists and Collectors, The Los Angeles Lawyer, May 2014.