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PaperclipPerfector  7mo ago (text post)   4718 thread views

Small-Scale Question Sunday for September 24, 2023

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I have heard, but don't have the know-how to confirm, that the following tax loophole exists:

  1. Commission a famous artist to create an art piece, for $50,000

  2. Get it appraised to be worth $5 million

  3. Donate it, getting a full $5 million tax writeoff

  4. Profit income_tax_rate * valuation - commission_cost

Is this more or less correct? If so, I have the following harebrained idea to take advantage of it / force the IRS to address it:

  1. Create an accredited 501c "NFT art museum"

  2. NFTs are already naturally WAY overvalued relative to their cost-to-produce, but just to encourage things to remain that way, create a custom NFT collection with a few accredited artists who are the only ones allowed to add to that collection. Make the transfer fee super high so that these NFTs are disincentivized from remaining in the market.

  3. Design this whole thing to be totally sincere. Call it the "Artist and Artist Appreciation DAO" or something. Nominally, the point is to fund the creation of new artwork. New NFTs are regularly commissioned and donated to the art museum, and whoever paid for the commission eats the tax benefits.

  4. Possibly tokenize the whole process so that it's easy to buy a $1 tax deduction for only $0.10. Honestly doubt this would work with the current tax code though even if the rest of the process does work. I think there would need to be some kind of organization filing copyrights on all created pieces of artwork, then legally filing somewhere that the ERC20 represents legal ownership of the artwork. Even then, it probably wouldn't work.

  5. Profit? Either infinite tax write-offs, or the IRS closes a loophole that should never have existed anyways.

Anyways, can anyone tell me why this definitely wouldn't work?

I think this only works because those involved have enough prestige to make it look legit. They can find somebody with letters after their name to back up their claims to artistic integrity. They have friends at museums with respectable names. They have money and by implication lawyers standing behind them.

IRS auditors are required to refer all gifts of art valued at $20,000 or more to the IRS Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.

Can you bamboozle the government artist auditors? That's the real test.

IRS auditors are required to refer all gifts of art valued at $20,000 or more to the IRS Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.

Interesting, I wonder what the guidelines are for art valued below $20,000. It's really easy for crypto to find loopholes and bust them open; it would be child's play to just create 100 pieces valued at $15,000 or something rather than one piece valued at $1.5M. The whole point is to put this loophole into the Common Man's hands anyways, so a $15,000 tax writeoff is reasonably close to the sweet spot.

I think this only works because those involved have enough prestige to make it look legit. They can find somebody with letters after their name to back up their claims to artistic integrity. They have friends at museums with respectable names. They have money and by implication lawyers standing behind them.

I absolutely agree, but that at least sounds like a somewhat tractable problem. There are some legit museums displaying NFTs, and some other legit museums minting NFTs from their artwork. If legit museums can display NFTs then presumably there is at least a little wiggle room there.

I am rooting for you...but suspect that Uncle Sam is going to be very much not amused and that this stunt could potentially land you in prison. Good luck. Consult a tax lawyer first - the very best you can find.

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