James's Blog

Tax Savings on Art

I smiled when I read about how this banana duct-taped to a wall fetched $120,000 at Art Basel and it got me thinking about art prices. It seems like people can actually make money by buying and donating art and that may contribute to the craziness of art prices. Here’s an example of how that could work.

George lives in NYC, makes $10,000,000 a year, and buys a $100,000 painting from an art dealer. The next week, he says the painting has appreciated in value to $1,000,000 and he donates it to a museum. George claims the donation as a charitable deduction on his taxes, which reduces his taxable income to $9,000,000, which reduces his tax from $5,147,857 to $4,627,397 [1]. By buying and donating the painting, George has made $420,460 (= $5,147,857 - $4,627,397 - $100,000).

The IRS won’t allow people to deduct arbitrary amounts for their donations. They require a qualified appraisal made by a qualified appraiser and the completion of various other forms and documentation [2].

But art is unique and tricky to value. Valuation experts are likely to be connected with the art dealer or the museum and both the art dealer and the museum have every reason to inflate the value of the painting. For the art dealer, a high appraisal shows that the art dealer’s wares are a great investment. It also pleases George, who just paid the art dealer $100,000 and might buy more in the future. For the museum, a high appraisal shows that the museum has a very valuable collection. It also pleases George, who just donated a $1,000,000 painting and might donate more in the future.

This tax savings trick is a bad deal for the government. Here are a couple options to prevent this trick:

  • Only allow deducting donations up to the original price paid. Then George would only be allowed to deduct up to the price he paid for the painting ($100,000), not the appraised price.
  • Don’t allow tax deductions for charitable donations.


[1] https://smartasset.com/taxes/new-york-tax-calculator

[2] https://www.irs.gov/publications/p561#idm140501147889776