Collectors, Disavowal, and Tax

Thursday, December 9, 2021

Collecting art is fulfilling for both personal and investment reasons.  Collectors may enjoy acquiring new pieces that visually complement or correspond with other works they own.  Or, they may purchase pieces based on what they believe will most appreciate in value over time.  Given the recent explosion of crypto art and persons proclaiming themselves to wear all hats at once as artists (specifically visual crypto artists), collectors, and dealers, coupled with a movement to proclaim everything and anything to be art, today collectors need to step up awareness of new developments and various legal snars and protections.  Two such issues include artist disavowal and taxation.

Disavowal

Under the Visual Artists Rights Act (“VARA”), codified as 17 U.S.C. § 106A, visual artists retain nontransferable rights of attribution and integrity to their artwork created after 1990.  To be clear, not every artist has rights under VARA, and not everything called “art” is protected by such rights. As reflected in 17 U.S.C. §§ 106A(a)(3), (A), (B) , VARA confers rights only on artists who have produced works of “recognized stature,” or whose “honor or reputation” is such that it would be prejudiced by the modification of a work. See Pollara v. Seymour, 344 F.3d 265, 269 (2d Cir. 2003).  “A work is of recognized stature when it is one of high quality, status, or caliber that has been acknowledged as such by a relevant community.” Castillo v. G&M Realty L.P., 950 F.3d 155, 166 (2d Cir.), as amended (Feb. 21, 2020), cert. denied sub nom. G & M Realty L.P. v. Castillo, 141 S. Ct. 363, 208 L. Ed. 2d 90 (2020). The relevant community will typically be the artistic community, comprising art historians, art critics, museum curators, gallerists, prominent artists, and other experts. Id.  “A work’s high quality, status, or caliber is its stature, and the acknowledgement of that stature speaks to the work's recognition. The most important component of stature will generally be artistic quality.” Id.  In most circumstances, expert testimony or substantial evidence of non-expert recognition will generally be required to establish recognized stature. Id.

VARA protects only things defined as “works of visual art” Id. The definition of a “work of visual arts” is narrow and “a critical underpinning of the limited scope” of VARA. Id. Indeed, “work of visual art” is defined as and limited to “a painting, drawing, print, or sculpture, existing in a single copy, in a limited edition of 200 copies or fewer that are signed and consecutively numbered by the author” as well as “a still photograph image produced for exhibition purposes only, existing in a single copy that is signed by the author, or in a limited edition of 200 copies or fewer that are signed and consecutively numbered by the author.”  17 U.S.C. § 101. A work of visual art does not include “(i) any poster, map, globe, chart, technical drawing, diagram, model, applied art, motion picture or other audiovisual work, book, magazine, newspaper, periodical, data base, electronic information service, electronic publication, or similar publication; (ii) any merchandising item or advertising, promotional, descriptive, covering, or packaging material or container; any portion or part of any item described in clause (i) or (ii); any work made for hire; or any work not subject to copyright protection under [The Copyright Act, which includes VARA].” Id.  A co-sponsor of the bill that became VARA testified that “this legislation covers only a very select group of artists.” H.R. Rep. 101-514 at 1990 U.S.C.C.A.N. 6915, 6921. This comment states the intent and heart of the VARA. 

VARA includes the right to attribution – for an artist to claim authorship of their work. 17 U.S.C. § 106A(a)(1)(A).   This includes the right to disavow, which means “the right to prevent the use of his or her name as the author of the work of visual art in the event of a distortion, mutilation, or other modification of the work which would be prejudicial to his or her honor or reputation.” 17 U.S.C. § 106A(a)(2).  While VARA does not define the terms “prejudicial,” “honor,” or “reputation,” courts have concluded that they should consider whether the proposed alteration would cause injury or damage to an artist’s good name, public esteem, or reputation in the artistic community.” Massachusetts Museum Of Contemp. Art Found., Inc. v. Buchel, 593 F.3d 38, 54 (1st Cir. 2010) (quoting Carter v. Helmsley-Spear, Inc., 861 F. Supp. 303, 323 (S.D.N.Y. 1994), aff'd in part, vacated in part, rev'd in part, 71 F.3d 77 (2d Cir. 1995)). The artist’s reputation in relation to the altered work of art is of great importance to a court’s analysis. Id. However, the artist is not required to have public stature beyond the context of the art at issue. Id.

Taxes

Despite the medium, whether you purchase, sell, or transfer in any way physical pieces of art, digital art, crypto art on the blockchain such as Non-Fungible Tokens (NFTs), or all of the above it is important to be cognizant that such exchanges are subject to myriad different tax and securities laws and regulations, and licensing requirements.

Given the recent passage of the Infrastructure Investment and Jobs Act, the SEC will begin imposing new cryptoasset information reporting requirements on brokers. Under the new legislation, a broker includes anyone who for consideration effectuates “transfers of digital assets on behalf of another person.”  The legislation does not explicitly exclude miners, validators, hardware and software makers, and protocol developers from the definition of a broker.  However, a U.S. Treasury Department official indicated that Treasury will not target miners, hardware developers, and others. “Digital asset” is defined under the legislation as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology.”

This means that anyone who transfers an asset on the blockchain, including an NFT, will be considered a broker subject to SEC rules for brokers and companion IRS and other rules and regulations governing reporting and ethics rules. 

If an individual sells a work after possessing it for less than one year and it has appreciated in value, they are subject to a maximum personal marginal income tax rate of 39.6%.  If they sell the work after possessing it for more than one year, they are subject to a capital gains tax at a maximum rate of 28%.  Finally, they may also be subject to a 3.8% net investment income if they are a married taxpayer making over $250,000 or a single taxpayer making over $200,000. Art sellers should be aware of these tax consequences when considering the purchase and sale of collected art. It is important to understand how your interest in art will be classified. The discussion below explains how to avoid incurring certain taxes relative to art and how certain costs can be written off.

For example, if an individual inherits collectibles, antiques, or works of art from an estate, they will only have to pay capital gains tax on any appreciation in value occurring after the death of the original owner.  Any appreciation in value that occurred during the lifetime of the original owner is not subject to tax.  The art/antique/collectible effectively gains a new fair market value as soon as it has been gifted to the beneficiary of the estate.

One popular way that individuals can avoid incurring capital gains tax is by donating works of art to museums, charitable organizations, and foundations in return for a tax break.  If the work of art directly relates to the mission of the organization to which it is being donated, for instance a museum, donors can usually write off the fair market value of the art on their taxes.  However, if the organization simply plans to resell the art for additional funding, then the donor can only write off the cost basis, or what they paid for the art.

When donating a work of art to an institution or gifting it to another individual, an appraisal performed by a qualified appraiser is required for tax purposes.  The IRS sets out criteria as to who counts as a qualified appraiser including that the individual is from a generally recognized professional appraiser organization, regularly receives compensation in exchange for performing appraisals, and does not have any conflict of interest with the appraisal that they are being asked to perform.  Appraisals are also required if a collector is buying insurance for their collection.

If a work of art is valued at $50,000 or more, it must be referred to the IRS’s Art Advisory Panel for possible review.  The panel is made up of 25 experts who serve voluntarily to assess whether the fair market value for the art in question corresponds to what the owner claims in federal income, estate, and/or gift tax cases.

Teresa Taylor
202.454.2885
taylortn@butzel.com 

Quendale Simmons
313.983.6921
simmonsq@butzel.com 

Stay Informed

Join our email list >

Jump to Page