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I have heard, but don't have the know-how to confirm, that the following tax loophole exists:
Commission a famous artist to create an art piece, for $50,000
Get it appraised to be worth $5 million
Donate it, getting a full $5 million tax writeoff
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:
Create an accredited 501c "NFT art museum"
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.
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.
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.
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?
Knowing very little about tax code, I think this shouldn't work because the jump from $50k -> $5million would be counted as profit in some sense, similar to if you buy $50k of stock and then sell it for $5 million. I think it's called an "asset appreciation tax"? So your taxable income would go up by 4.95 million from having an asset you paid $50k for go up in valuation, and then down by $5 million for the donation, giving you a net -$50k (because you spent $50k that you then donated). But I'm not certain this is how it actually works.
That's definitely how it should work, but I believe is not how it actually works if you donate it. I'm in the same boat as you though and am not exactly an authority on this.
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