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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?

The short version is the IRS knows about this trick and has a very successful record of prosecuting people who try to use it.

That looks very different to me since the appraisal was faked.

It seems like it would be hard to pull off this trick without faking the appraisal; if the artist's paintings are for-real worth $5,000,000, then he could just paint them and sell them for that price rather than accepting literally 0.01x that payment from you.

Elsewhere I said:

Just like with regular art, I think the process of donating it to charity actually increases its fair market value. Also, the fact that it was commissioned (rather than being sold directly by the artist) increases its fair market value. Yes, that isn't how these things should work, but art is mostly signaling anyways so in this case you literally get what you pay for; the more you pay the more valuable it is.

So, I think it is evident that there exist situations where I could create, then donate, an art piece worth $5MM, without being able to create and sell the piece for anywhere near as much.

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