Buying an artwork or selling one from an existing collection can be a long process with lots of factors that can affect the final price. One of them is taxes. Various taxes can significantly raise the price of art you are looking to buy or sell. That’s why we composed a list of several different taxes you need to consider before purchasing or selling an art piece.
Sales tax has to be paid in the country in which the sale occurs. If the artwork is sold by the collector, dealer, gallery or an auction house, the seller will collect the tax from the buyer and then transfer it to the government. In the U.S., sales taxes vary significantly from state to state. Montana, New Hampshire and Oregon do not have sales taxes at all.
Other states like Tennessee have a 9.46% sales tax on artworks. Sales tax is charged when the artworks are purchased within one U.S. state with the intention of keeping it in that state. If the artwork is shipped to another U.S. state instead of sales tax, use tax rates apply.
Use tax is paid when the artwork is purchased in one U.S. state and immediately shipped to another state. For example, if you buy an artwork in New York and ship it immediately to Colorado, instead of paying for sales tax in New York you’ll only pay the use tax set by the state of Colorado.
Use tax also varies from state to state. Many collectors use this regulation to save money on taxes by purchasing it in one state and then immediately shipping it to a state with lower use tax rates. If you are planning to do that, make sure that the seller arranges the shipping. Otherwise, you might end up paying for the sales tax instead.
To avoid paying taxes, many collectors use freeports for storing their art. If you send the art you purchased directly to a freeport, you’ll avoid paying both sales and use tax. Keep in mind, however, that as soon as the artwork leaves the freeport and gets delivered to a new location, taxes will have to be paid at the usual rates. But if you are buying art as an investment, and you have no intention of hanging it at your home, you can resell it directly from the freeport to another collector without paying for sales and use taxes whatsoever.
Capital Gain Tax
But what if you are an art collector looking to sell an artwork you purchased long ago, that simply doesn’t fit into your collection anymore. If the piece you are trying to sell has risen in value since you first purchased it, you’ll have to pay capital gains tax after the sale. Let’s say you bought an artwork for $10,000, but in several years you find a buyer willing to pay$100,000 for it.
When you sell that artwork, you’ll have to pay a capital gains tax on the difference – the $90,000 gain you earned by reselling the piece. Capital gains tax rates in the U.S. are 28%plus an additional 3.8% of Medicare tax under the Affordable Care Act. That means that you will have to pay a total of $28,620 for taxes (31.8% of the $90,000 profit).
Income tax is similar to capital gains tax. The only difference is that income tax is paid if the artwork is sold within a year of the original purchase. Depending on the earnings, living situation and the marital status income tax can reach 37% of the profit, which is why most collectors prefer to hold on to their art for over a year and pay the 31.8% capital gains tax instead.
Collectors in the U.S. don’t have to pay resale tax, but if you live in the EU or UK you’ll have to pay these taxes as well. Under the Resale Rights Directive, art sellers have to pay resale royalties to artists or artists’ heirs when they resell their works. The royalties span between 4% (for artworks under €50,000) and 0.25% (for artworks over €500,000) with a maximum resale tax set at €12,500.
Value Added Tax (VAT)
Value added tax is another tax you might have to pay if you’re buying an artwork from countries outside of the U.S. Value added tax has to be paid when artworks are bought from artists, dealers, galleries or auction houses that are VAT registered.
The VAT tax is usually integrated into the price of art by the seller and it usually amounts to 15% to 20% of the artwork's value. If you are buying or selling art through a middleman (gallery, auction house or dealer), you might have to pay VAT on their commissions as well. To avoid paying for VAT, many collectors decide to buy an artwork from a middleman located outside of the EU and the UK and then just pay for the import fees instead.
These are some of the taxes you should consider when thinking about buying or selling art. Since keeping up with all these taxes can be tricky, it’s advisable to hire a professional to help you out. Only they can tell you for sure how much an artwork really costs.