The Subtle “Art” of Billionaire Tax Evasion- An Asset class for the Ultra-Rich
3 min read
“When bankers get together, they discuss art; when artists get together for dinner, they discuss money.” – Oscar Wilde.
Around 84% of the ~$67 Bn global art market is dominated by just 3 countries: the US (44%), China (19%), UK (21%). And just 2 auction houses Christie’s and Sotheby’s account for over 44% of global art sales. These 2 auction houses accounted for over ~400 Mn worth of artworks sold in the year 2019. What “Bitcoin” is to the Genz & millennial middle class in recent times, Art has been to multi-millionaires & billionaires for decades. Just a more sophisticated and scarce version.
- Leonardo Da Vinci’s “Salvator Mundi” is World’s most expensive painting at ₹3,300 Cr! – bought by the Saudi Royal family in 2017 for $450 Mn at Christie’s auction.
- Billionaire hedge fund chief Steve Cohen bought Lichtenstein’s ‘masterpiece’ for $165 Mn in 2017. Cohen’s art collection is valued at over $1 billion, but he is constantly buying, selling, and upgrading. He sold a Jean-Michel Basquiat painting called “La Hara” via Christie’s in May 2019 for $34.9 million, well over the $22 Mn to $28 Mn estimate!
Demand in art markets at times even signals which industry is booming & churning surplus cash flows into ultra-luxury purchases. Tech startup ‘exits’ boom, bulk ESOPs, PEs, VCs cashing in IPOs? Banking, IB, hedge funds, real estate highs? Sports, music, or other business sectors flourishing? Money flows towards ultra-luxury goods like fancy expensive artworks.
Two ways ultra-rich buyers look at Art:
- Admire the beauty
- Financial instrument.
Best place to store art in the second case of ‘art as a financial instrument’?
• Free ports are warehouses where high-priced art is stored without sales tax, duty-free & moved without falling under the particular nation’s tax radars. A Swiss bank for Art.
The oldest free port in Geneva, Switzerland holds the greatest collection of 1.2 Mn artworks (including around 1,000 works by Picasso) that nobody is allowed to see. This is held in super high security and in total these are valued at ~$100 Bn!
• Art being used to evade US federal taxes legally, How?
Basic example: Mr. X bought artwork for $1 Mn in the year 2010, By the year 2015, it’s worth $8 Mn (appraised value by an art professional or an influential art gallery, which might be run by Mr. X’s weekend golf buddy). Now, taxable income from actual business in the year 2015 for Mr. X was $10 Mn. Then, he donated that art to a top museum for display. And, deducted $8 Mn from 2015 taxable income factoring art donation charity work for the museum. Maybe a few years later even buy back the art via a ‘set up’ auction at a lower price?. In July 2020, the US Permanent Subcommittee on Investigations published a report arguing that the art market’s lack of transparency allowed Russian oligarchs linked to President Vladimir Putin to purchase $18 Mn of art via a shell company, avoiding U.S. sanctions on financially corrupt elements in Russia.
In September 2020, the globe was rocked by FinCEN files leak, which detailed over 2,500 documents sent to FinCEN (Financial Crimes Enforcement Network) reporting about $2 Tn worth of suspicious transactions moving via major global banks and shell companies in Hong Kong, USA & London.
• Indian Art Market was valued at ₹200 Cr in the year 2000, went to ₹1,700 Cr by 2020, projected to go to ₹16,000 Cr by 2040. Still a smaller fraction of the global market size. With NFTs gaining momentum in recent times and a chunk of the multi-billion art industry flying under regulatory and the majority of the public’s focus radar, what are your thoughts on this elite dark horse, but a bit shady sector?
“I often think that the night is more alive and richly colored than the day” – Vincent Van Gogh.
