IRS Going After Investors Who Buy Art Overseas

By Alan Olsen, CPA, MBA (tax)
Managing Partner
Greenstein Rogoff Olsen & Co. LLP

Who comes to mind when you think of famous artwork? Picasso, Van Gogh, Rembrandt and Uncle Sam. Wait, one of those is not like the other. Although paying taxes on valuable artwork may not be something a lot of people have to worry about, for wealthy individuals who buy, sell and/or trade valuable artwork the IRS is starting to become a real problem.

Don’t Forget the IRS

Several affluent people have been moving large sums of money around in order to be involved in overseas art auctions. However, the IRS has taken notice of this and, as with everything else, they want their cut, too. They have even gone as far as to issue a warning to all those who are participating in these kinds of practices. It states:

"There have been recent reports about the interest of the Internal Revenue Service (IRS) in taxpayers with offshore bank accounts. The IRS reminds you to report your worldwide income including online auctions sales to foreign customers on your U.S. tax return and lists the possible consequences of hiding income overseas. If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S."

Penalties Are Possible

That statement begins with a gentle reminder, but notice that it also makes sure to mention the possible consequences. So make no mistake, the IRS wants a piece of the pie and they are willing to threaten wealthy individuals with stiff penalties if they don’t comply.

There Are Still Ways to Save

Despite the IRS’s efforts to go after their share of this income, there are some ways to save on some of these taxes. However, you need to understand all the detailed intricacies involved. That is where GROCO can definitely make a difference. We can help you hold onto your wealth by advising you on tax planning in the buying, selling and trading of artwork. According to the IRS:

"Internal Revenue Code (IRC) Section 1031 permits tax deferral on the sale of artwork provided the investor adheres to the Treasury Regulations and IRC rules and timelines. Investors with private art collections held primarily for investment or for use in their trade or business can defer 100% of their capital gain tax liability if they exchange one art collection or a single piece of artwork for another."

Specific Stipulations

That sounds like a positive thing, however, make sure you understand that in order to ensure that your tax-deferred exchanges meet the qualifications you must exchange foreign art for foreign art or U.S. art for U.S. art. Also, keep in mind – and this is important – that if you are solely a collector and are not trading as an investor, then you will be subject to the full brunt of the IRS, because personal property will not qualify for a tax-deferred exchange.

Tax-Deferred Gains

In other words, usually when you sell investment or business property and have a gain, you normally have to pay taxes when you make the sell. However, IRC Section 1031 makes an exception to the rule because it allows you to postpone paying taxes immediately if you reinvest the proceeds in similar property. It therefore becomes tax-deferred.

GROCO Can Help You Save

The bottom line is the IRS wants its cut in the practice of art dealing and they aren’t afraid to strong-arm you to get it. Although you do need to pay the proper taxes on this kind of income, according to the law, GROCO can help ensure that you get every deduction to which you are entitled.