Financial hardship has been another consequence of the Coronavirus pandemic. The latest market swings have impacted many portfolios, as has loss of employment, or business losses and closings. This state of economic affairs has prompted many to look at their saleable assets in order to raise cash. Tough times require tough measures, but as accountants and tax planners, we strongly urge you to consider the tax ramifications when you contemplate the sale of any large asset. No matter what the transaction, do your best to make it as tax-efficient as possible.
In a prior article we looked at the sale of an inherited family home. In this article we address the taxes incurred when selling works of art. Sellers of art receive different treatment under the tax code than sellers of other appreciated assets. Gains from selling stocks or bonds are taxed at 20% plus the 3.8% net investment tax. Gains from the sale of art and other collectibles are taxed at 28% plus the 3.8% net investment tax. To complicate things even more, you are treated differently depending on your status as a taxpayer and relationship to the art!
Some good news for those having to part with art due to the pandemic – the CARES Act increased the limits for deductions for charitable donations from 50% to 100% against adjusted gross income. But as we are dealing with the IRS after all, there may still be tax consequences when selling or even donating artwork or “collectibles.”
Art collectors can be dealers, investors or just regular folk. If you buy art as a hobby, or let’s say just to decorate your home or business walls, and decide to sell an expensive piece to generate some cash to pay bills, the piece you sell is considered a capital asset in which gains are recognized but losses are not allowed. On the other hand, for an investor who buys art with the intention of someday making a profit on it, the IRS says that when it is sold it is taxable as a capital gain. In this instance, a capital loss is available because the transaction is entered into for profit.
Dealers or gallery owners who buy and sell art in a business context are taxed just like any other retail establishment. All income from the sale of the art is taxed as ordinary income. Expenses, if ordinary and necessary, are deductible. Dealers sometimes want to be classified as investors because of the favorable capital gains rates, and usually separate the two activities.
That brings us to charitable contributions of art you may be considering to take advantage of the Cares Act. Generally, the charitable contribution deduction for artwork by art galleries, dealers or the artist who created the artwork is limited to the lesser of the fair market value on the date of contribution or the taxpayer’s adjusted basis in the artwork. In addition, an adjustment to cost of goods sold must be done to prevent a double deduction.
You must also take into consideration whether the artwork being donated is actually held as an investment or as inventory of the owner. The charitable contribution deduction for the long-term capital gain property is generally its fair market value, while the deduction for a contribution of inventory is limited to the lower of cost or fair market value.
However, in the case of an investor or someone who dabbles in art as a hobby, they are allowed a charitable contribution deduction for the donation of long-term capital gain property equal to the property’s fair market value.
Reach Out To Us: If selling a piece of artwork, or another large appreciated asset, is a way for you to weather the economic storm we find ourselves in, please take into consideration the following:
• What the net after tax return on the sale will be, and
• With the 100% deduction against adjusted gross income, should you consider offsetting the gains with a charitable donation or leverage the donation through a split interest trust, such as charitable remainder and charitable lead trust.
Got questions about tax-efficient sale of assets? We have answers at CPA@fuoco.com.
