Classifications and Tax Implications for Artwork Collectors [Infographic]

Collectors of artwork can be classified in one of three ways for tax purposes. Each classification has different tax implications.

Dealer – one who regularly buys and sells art as a trade or business.

Investor – one who buys and sells art primarily for making a profit and not for personal pleasure, but is not in the business as such.

Collector – one who collects as a hobby with no profit motive. One who buys and sells artwork primarily for pleasure is neither a dealer nor an investor.

 

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Tax Treatment for Artwork Held Long-Term (More Than One Year)

Dealer

  • Gain – at ordinary tax rates
  • Loss – at ordinary tax rates

Investor

  • Gain – 28% capital gain tax rate
  • Loss – capital loss (net against capital gains)

Collector

  • Gain – 28% capital gain tax rate
  • Loss – not deductible

Absent a dealer status, the IRS will usually treat the person involved with collectibles as a collector, especially if a loss is involved.

Factors to Consider When Determining Tax Status

Dealer

  • Seeks out various artists to represent
  • Builds relationships with collectors and museums whose interests are likely to match the work of the represented artists
  • Some are able to anticipate market trends
  • Some may be able to influence the taste of the art market
  • Many specialize in a particular style, period or region
  • Resell works of art either in their galleries or directly to collectors

Investor

  • Does not purchase or sell art without fully understanding a work’s fair market value
  • Typically makes acquisitions regardless of their aesthetic attributes
  • Keeps and organizes business-like records for their collection
  • Purchases insurance to protect their investments
  • Demonstrates a history of success in converting art purchases for a profit
  • Devotes and memorializes in writing the substantial amount of time devoted to art purchases and sales

Collector

  • Purchases a painting simply because they like it or because it matches their décor
  • Keeps art investments in their home for the entire duration of their ownership
  • May comingle money received from the purchase and sale of their art

For tax purposes, investors must demonstrate that they seek professional advice from an art appraiser on:

  • Art movements that are appreciating or depreciating
  • Artists whose works demonstrate an upward trajectory in value
  • Undervalued artwork that is likely to increase in value
  • Written evaluation of market trends with regard to art collecting in general
  • The best time to purchase or dispose of specific pieces of art
  • Comparable values of works by different artists

Hiring professional fine art appraisers to produce formal, written reports when you purchase or sell your art is critically important to convince the IRS or tax court that you are a profit-motivated art investor and not just an aesthetics-motivated art collector.

Conclusion

Dealers, investors and collectors are three different types of art collectors, each with their own qualifications and tax implications. Dealers regularly buy and sell art as a business, representing a variety of artists and typically selling in their own galleries or to collectors. Investors buy and sell art for the purpose of making a profit, though they do not do so through a business. Investors must demonstrate that they seek professional advice and obtain formal, written reports in order to be classified as an investor for tax purposes. Collectors simply purchase art for personal pleasure without the intent to make a profit.