Art Tax Considerations


Chapter 3 of 4

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Art Tax Considerations (Chapter 3 of 4)

I wrote this white paper for the Family Office Association. For online reading purposes,
this white paper is divided into 4 chapters. There’s a link to Chapter 4 at the end of this
chapter.

Classifications for Tax Purposes

The U.S. Internal Revenue Code treats collectibles such as art as a special class of
capital assets taxed at a maximum rate of 28% vs. 20% for non-collectible financial
assets.

There are three classifications of taxpayer status as it relates to art: investor, dealer, and
collector:
• Investor: “To be classified as an investor, the individual must acquire art
primarily for the purpose of making a financial investment rather than for personal
enjoyment.”1 Factors to be considered include the individual’s history of gains
from art sales, expertise in art, and the presence of elements of personal
pleasure or recreation.2 Profits from art sales are taxed as capital gains.
• Dealer: Dealers are individuals engaged in the “trade or business” of dealing art
during a taxable year. “In order to be considered engaging in an art dealing
business, at a minimum, an individual must be engaging in art transactions with
continuity and regularity, and the primary purpose of those transactions must be

1 IRC Sec. 1031(a)(2)(A)

2 Treas. Reg. Sec. 1.183-2(b)

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 for income or profit.”3 Profits realized from art sales are taxed as ordinary income
(37% maximum federal income tax rate rather than capital gains rate for
collectibles of 28%).
• Collector: Individuals who fit neither the definition of investor or dealer are
collectors. Collectors receive the tax benefit of having their profits from art sales
treated as capital gains.

Section 1031 “Like-Kind” Exchanges

Many collectors build their collections by starting with smaller pieces and trading up to
more expensive art works. Similar to real estate transactions, individuals falling in the
“investor” category have been able to avail themselves of favorable tax rules permitting
the deferral of federal capital gains tax on like-kind exchanges. This gain deferral has
been repealed for art under the H.R.1 Tax Reform rules.

Recordkeeping
Family Office finance and administrative staff should keep thorough records of
recipients and invoices and details within their inventory records such as:
• Name of artist
• Description of artwork
• Location
• Cost basis
• Insurance value
• Fair market value
• Name of purchaser
• Name of seller

This type of documentation also supports provenance, which is important to confirm

authenticity of art works. Provenance is proven by documentation on ownership
beginning with the creator to current seller and includes the involvement of art experts
to protect against fraud.

3 Comm’r v. Groetzinger, 480 U.S. 23, 1987.

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Link to Chapter 4

About Family Office Association:



Family Office Association is a global community of ultra-high net worth families and their single family
offices. It is committed to creating value for each family that we serve; value that grows wealth,
strengthens legacy, and unites multiple generations by speaking to shared interests and passions.

About the author:

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Mary Elizabeth Klein is a Family Office and Private Equity Executive providing sustainable solutions for
businesses. Mary has extensive experience in building profitable businesses and developing relationships
through strategic operational and tax execution and technological improvements. She is passionate about
positioning organizations to emerge successfully through change by establishing structure and a
foundation to stabilize them and expand their platform for growth.