This has been replicated in the NFT market, with a slightly different structure: sell NFTs to yourself to "paint the tape" and create the impression that a hot resale market exists, then sell to random suckers looking for appreciating assets.
Someone minted 1 million Neeraj Agrawal (cryptocurrency advocate* who's big on Twitter) NFTs, sent him 999,999 without his consent, and kept the other to sell. Which leads to the interesting question, should Neeraj report the 999,999 as a gift receipt if they have some value, and is he in a bad position that the tax value of the gift is large due to the price being determined by the 1 that was sold?
(I don't understand NFTs so I may be incorrect on details).
If the 999,999 were worthless at the time they were initially transferred, then there is no taxable event.
Now if they become worth $1 each and he sells them at that price then it is a taxable event. The threshold may have changed with respect to gifts but if the coins were worth $1 at the time they were initially transferred there may be a taxable event, I think it used to be $50k was tax free.
People aren’t in control of who sends their wallets coins and unless there is a notification system setup it seems like the tax responsibility would arise when they attempt to use the coin. Also if everyone were responsible for every trade that occurs within their wallets, and have say with one trade they make a large profit and owe the government taxes, then in the next trade they lose the profit, are they responsible for loss of government property? Also what about an auto trading bot that is run by a neural network that makes trading decisions based off key words in the news, if it is responsible for losing the would be taxes, who is to blame? It’s creator? The philosophical questions from this stuff pick apart out we normally think about this.
Economics Explained is somewhat of a hack when it comes to topics outside of basic supply and demand. On the internet, every struggling business and every collectible hobby is a front for money laundering. While there is certainly a lot of money laundering and tax evasion in the high art world, that's only because they can hide their transactions behind the majority of legitimate transactions. In the case of the Salvator Mundi painting, the valuation of the painting skyrocketed because allegedly the last two bidders were both Arab princes who thought the other bidder was from their mutual rival, the Qatari royal family. $450 million was the legitimate market value if the painting to the Saudi royal family.
If I question the legitimacy of Economics Explained, then I'll be forced to asses the value of the honorary PhD in economics that I gave myself from my prestigious, non-accredited university, and I don't want to do that.
Matt Levine wrote about something similar today in his column "Money Stuff" (the third story, "Tax Law"):
> You have zero-basis stock that is “really” worth $100, but that happens to be trading at $300 right now because the market doesn't know the bad news that you know. If you sell it, you get $300, pay 20% tax, keep $240, and go to prison for insider trading. Or you can wait until the news is public, sell it for $100, pay 20% tax, keep $80 and avoid prison.
> But if you donate it while it’s still trading at $300, you get a $300 tax deduction, which is worth $120, which is more than $80. And you don’t go to prison because you never traded the stock while you had inside information.
Nope. You don't sell it. You donate it. It's considered a charitable contribution, not a sale, and that makes it 100% tax deductible. [1]
I guess you'd have to spend $20 million on the painting, but you're buying it from yourself, so in reality you're only on the hook for the 2% fee from the auction house.
Before that though, when you bought your own painting for $20M. I'd imagine it would be pretty difficult to write off that purchase as a business expense or something. The IRS is going to notice a $20M write-off for a business with no additional income pretty quick. But you will have to pay taxes on the $20M income, even if it is coming from yourself.
In the above example you pay capital gains on the one (1) $20m initial painting that allows you to then donate N "equal value" paintings. So you can dilute the capital gains % indefinitely (1/N).
But your tax basis in the other paintings is still $1M. If you donate them claiming they're worth $1M, you don't get a $20M deduction. If you claim they're worth $20M then transferring them is a realization event and you owe capital gains on $19M. Then you get a $20M deduction which cancels out the capital gains and leaves you with just the original $1M deduction for what you actually paid, right?
What people really do this for is insurance fraud. Buy some paintings for $1M each, get them appraised and insured for $20M each, then somebody "steals" them or you have a convenient structure fire and make the N*$20M insurance claim.
As another poster said, assuming paintings are treated like stock, as long as you've held it for more than one year, donating an aprechiated asset is magic.
In this example, you get a $20M deduction and you don't have to realize the $19M gain.
Depending on how the shill purchase in the hypothetical is arranged, you might have realized a gain there... but then again, maybe you just pay the auction fees.
If you don't hold it for the year you still don't realize the capital gains, but you only get to deduct the cost basis. After a year you get to deduct the current value.
Unless paintings are different than other assets commonly donated (e.g. stocks), this doesn’t sound right. If I donate a stock that has appreciated in value, I pay no capital gains tax and am still able to deduct the full market value of the stock (up to certain limits).
> If you claim they're worth $20M then transferring them is a realization event and you owe capital gains on $19M. Then you get a $20M deduction which cancels out the capital gains and leaves you with just the original $1M deduction for what you actually paid, right?
Nope. Think of it this way:
- you lobby government to make charitable donations tax deductible, meaning you can reduce your income by the stated value of the donation
- you use the auction house hack to inflate the value of the painting from $1_000_000 USD to $20_000_000 USD buy buying it from yourself
- No one will buy your painting for $20_000_000 USD, so it's not really worth that in the open market, but the art museum (in your backyard & founded by you) will give you a receipt stating the art is worth $20_000_000 USD
- Unless you reduce your income, your tax rate is 50%, so you donate the inflated art piece (to your art museum in your backyard), give yourself a receipt for the donation
- You attach that receipt to your tax return, lowering your taxable income from $A_LOT to $A_LOT minus $20_000_000, which at a 50% tax rate saves you $10_000_000 in taxes
"The federal tax code allows you to contribute long-term appreciated securities—such as stocks, bonds, and mutual fund shares—directly to a charity without paying capital gains tax on the appreciated value, as you would if you sold it first and then contributed cash to the charity." [1]
You can of course donate $20 mil to a charity that you can influence (a foundation of a relative or a friend’s family, say) and get that charity to buy the first painting at auction.
This way you pay cap gains on 19 million but can offset 20 million of charity donations against the gain.
You don't pay (an income or capital gains) tax when you buy something. Only when you sell it. Maybe there's some other tax, like VAT or luxury or sales that are all based on the purchase price.
Donating assets to charity is not a realization event under US tax law. This is why donor-advised funds are a thing - this rule applies to publicly traded securities, which means you can donate appreciated stock to a DAF and have the fund distribute cash to charity on your behalf, avoiding the capital gains you would incur if you normally sold appreciated stock and donated the proceeds.
So I think I'm wrong. I'm doing the math for selling the asset and donating the money. In theory just donating the asset shouldn't make any difference -- either it's a realization and that cancels with the donation, or you're donating at the original tax basis, and either way the net deduction is the original tax basis. Because otherwise it's double counting and you get all kinds of bizarre incentives and rich people not paying any taxes.
For example, if you bought $1 of a stock that appreciated to $1000 and they increased the capital gains rate to 60%, you wouldn't pay any taxes. The IRS would take in less money from the higher rate. Because even if you don't care about charity at all, you'd donate half the stock to a charity when you go to sell the other half and keep 50% of the money instead of 40%. The IRS would get nothing instead of whatever they got at the lower rate.
But the tax code is full of bizarre incentives and rich people not paying any taxes, so apparently this is one of them. (Which at least has the benefit of encouraging charitable donations.)
Yeah I agree that it's weird, unintuitive, and not how the ideal tax code should work. It shouldn't matter whether you or the charity sells the stock. Similarly, it shouldn't matter whether you or your heirs sell your stock, but it does, and that's a whole other can of tax optimization worms.
This is because the cost basis of assets "steps up" on the owner's death to the fair market value at that date - without any capital gains owed. So if you own $10m of non-dividend paying stock, you can comfortably borrow and spend $200k/yr against it, pay no income or capital gains taxes, and when you die your heirs don't owe any capital gains either and can sell off a portion to repay the loan.
Any charitable giving of over a low threshold would be audited for value to prevent this type of grift. You'd likely end up in serious tax trouble.
For example: "Donating non-cash items to a charity will raise an audit flag if the value exceeds the $500 threshold for Form 8283, which the IRS always puts under close scrutiny. If you fail to value the donated item correctly, the IRS may deny your entire deduction, even if you underestimate the value."
Yes if you're poor, that would stick out on your tax returns. If you're rich and other parts of the tax returns are even more complex, I think this would fly without any problem.
From rich friends' experience, that's not how it works. The bigger the fish, the more resources get thrown at it. A friend got audited and they came up with the most absurdly tiny mistakes in really complex things. It turned out they couldn't find anything they thought was more than a mistake, but their thoroughness was pretty incredible.
The difference is that the rich have the lawyers to deal with that. You shouldn't worry about them. An audit for a rich person is just another annoyance that they pay to go away, it is not gonna change their behavior.
This is why you hire someone to appraise the value of the item and document the third-party appraisal. If someone else says your painting was worth $20m on the day you donated it, and they're wrong in the view of the IRS, well, it's an honest mistake on your part and at worst you just have to pay some money for getting caught.
Once it's valued correctly by a proper appraiser you will not get the tax scam to work. They are not as dumb as this chain of posts assumes. Neither is the IRS.
There is a hole in this logic. It’s perfectly legal in the US to create your own religion proclaiming you as a deity whose boredom will destroy the universe and thus you need lots of expensive toys to keep your boredom from collapsing the universe. Any religion can have a nonprofit organization formed around it, making it acceptable and even expected that any donations made to that religious nonprofit are used to carry out the observance of that religions doctrine, that being the purchase of more expensive toys to prevent your boredom from ending the universe. Any donations to the religion would be not taxable.
> You still have to take a capital gain on $1 million -> $20 million when selling it, right?
Sure, the idea is that you only realize the gain on one work by the artist, and then can donate multiple. But even at one work “sold” and one donated its a win if you hold the piece for a year and a day before selling, since you (assuming you are at the top marginal rate for income and cap gains for simplicity) pay cap gains on $19 million @ 20% ($3.8 million) and then get a deduction of $20 million against income that would be taxed @ 37% (saving $7.4 million) for a net savings (even after the $2 million cost of purchasing the paintings) of $1.6 million.
Couldn’t it be said that by holding onto the coin instead of selling it /avoiding the taxable event you are inherently depriving the government of the interest they would have made from the taxes on that amount?
“The late Chairman Lee’s collection of antiques, Western paintings and works by Korean artists — approximately 23,000 pieces in total — will be donated to national organizations,” they said, in recognition of his passion for art collection and “his belief in the importance of passing on our cultural heritage to new generations.”
I’ve had a similar scam explained to me by someone who said they do it for their own tax obligations (on a much smaller scale).
I have no clue why non-liquid donations are allowed. Stock with a clear market value (publicly traded) seems fine, but everything else should require an arm’s length transaction to liquidate the asset.
(And maybe you would be able to 1) book the donation in the year you initiate the sale to account for assets that take a long time to sell, and 2) still have gains exempt provided all proceeds are going towards a donation.)
The $10M figure is incorrect because donating a $20M painting doesn't save you $20M in taxes, it only allows you to deduct $20M from your income, and even that amount is capped. The actual amount of taxes you save is roughly $20M * your marginal rate. There's also the $10M you spent to acquire the painting, which eats into the savings.
That said the general premise is valid. The loophole comes from the fact that when you donate something, you don't have to pay capital gains on it, yet you can deduct the full value from your returns[1].
[1] "If you donate long-term appreciated assets like bonds, stocks or real estate to charity, you generally don’t have to pay capital gains, and you can take an income tax deduction for the full fair-market value." https://www.fidelitycharitable.org/guidance/charitable-tax-s...
I'm not sure if I see your point. The SALT deduction is completely separate from the deduction for charitable contributions.
Maybe before the cap, you could argue that the true combined marginal rate was lower than 50% since the deduction for the state income tax would offset some of the federal tax, but a $10k deduction doesn't matter much to someone who's making enough to be in the top income brackets.
Because your taxable income is $20 million less after the donation, and the top marginal tax rate (if you're rich enough to be playing this kind of game) is 37%.
The waters get a bit muddier with the capital gains tax you might be paying on the original sale, but presumably with the right accountant you're still saving some millions, whether 3 or 8 or 10.
One person buys the painting at the auction, but then hundreds of others can deduct the tax if they already had a painting they purchased at a much lower value.
That only works if the IRS considers the price of the art to be $20m. If it were that easy then you could just donate anything at whatever price you want.
High art is valuable because high art is expensive. I'm not losing $450 million when I buy a $450 million painting any more than I lose money when I buy a house.
This whole thing is a conspiracy theory created by judgemental people with null knowledge of art to complain about the latest modern art pieces and it spiraled out of control to an urban myth in the level of "the Facebook app is secretly using your microphone" or "vaccines give you tracking microchips".
Everything is made up and the example cited above is very close to the story of “For The Love of God” by Damien Hirst [0]
The sculpture is more of a pointer, or some direct object upon which could be acted the work of art which was the financing valuation and theoretical sale of the work
In most experiences, it starts with how anything is priced. How long did it take to make it and how much money did it take to do so. Plus some. And then what will someone pay for it.
But that’s just “most” and that never makes headlines or anecdotes
- Buy N paintings form one artist for $1 million USD a piece.
- Put 1 painting up for auction.
- Have coconspirators bid the painting up to say $20 million.
- Buy your own painting for $20 million, and imply that your other paintings by the same artist are also worth $20 million.
- Donate a "$20 million" painting to an art museum (that maybe you control) & save $10 million in taxes.
- Complain about tax hikes on the rich as the not-rich subsidize your art collection
[1] The Economics Of The Art Market: Why This Painting Isn't Worth $450 Million -- https://youtu.be/V5sOuET8UWA