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In the above example you pay capital gains on the one (1) $20m initial painting that allows you to then donate N "equal value" paintings. So you can dilute the

In the above example you pay capital gains on the one (1) $20m initial painting that allows you to then donate N "equal value" paintings. So you can dilute the capital gains % indefinitely (1/N).

AnthonyMouse 5y ago
But your tax basis in the other paintings is still $1M. If you donate them claiming they're worth $1M, you don't get a $20M deduction. If you claim they're worth $20M then transferring them is a realization event and you owe capital gains on $19M. Then you get a $20M deduction which cancels out the capital gains and leaves you with just the original $1M deduction for what you actually paid, right? What people really do this for is insurance fraud. Buy some paintings for $1M each, get them appraised and insured for $20M each, then somebody "steals" them or you have a convenient structure fire and make the N*$20M insurance claim.
- sbelskie 5y ago
  Unless paintings are different than other assets commonly donated (e.g. stocks), this doesn’t sound right. If I donate a stock that has appreciated in value, I pay no capital gains tax and am still able to deduct the full market value of the stock (up to certain limits).
- toast0 5y ago
  As another poster said, assuming paintings are treated like stock, as long as you've held it for more than one year, donating an aprechiated asset is magic. In this example, you get a $20M deduction and you don't have to realize the $19M gain. Depending on how the shill purchase in the hypothetical is arranged, you might have realized a gain there... but then again, maybe you just pay the auction fees.
  - ThrustVectoring 5y ago
    EDIT: this was wrong, did research and you actually have to hold for a year Original: Holding a year or not doesn't matter for donating appreciated assets, AIUI
    - Bedon292 5y ago
      If you don't hold it for the year you still don't realize the capital gains, but you only get to deduct the cost basis. After a year you get to deduct the current value.
- devoutsalsa 5y ago
  > If you claim they're worth $20M then transferring them is a realization event and you owe capital gains on $19M. Then you get a $20M deduction which cancels out the capital gains and leaves you with just the original $1M deduction for what you actually paid, right? Nope. Think of it this way: - you lobby government to make charitable donations tax deductible, meaning you can reduce your income by the stated value of the donation - you use the auction house hack to inflate the value of the painting from $1_000_000 USD to $20_000_000 USD buy buying it from yourself - No one will buy your painting for $20_000_000 USD, so it's not really worth that in the open market, but the art museum (in your backyard & founded by you) will give you a receipt stating the art is worth $20_000_000 USD - Unless you reduce your income, your tax rate is 50%, so you donate the inflated art piece (to your art museum in your backyard), give yourself a receipt for the donation - You attach that receipt to your tax return, lowering your taxable income from $A_LOT to $A_LOT minus $20_000_000, which at a 50% tax rate saves you $10_000_000 in taxes
  - wtracy 5y ago
    - you use the auction house hack to inflate the value of the painting from $1_000_000 USD to $20_000_000 USD buy buying it from yourself Isn't that a realization event right there? Obviously, the described scheme could still work if you sold one painting to yourself, and then donated N paintings based on that valuation.
    - devoutsalsa 5y ago
      "The federal tax code allows you to contribute long-term appreciated securities—such as stocks, bonds, and mutual fund shares—directly to a charity without paying capital gains tax on the appreciated value, as you would if you sold it first and then contributed cash to the charity." [1] [1] https://www.fidelity.com/viewpoints/personal-finance/tax-breaks-for-charitable-giving https://www.fidelity.com/viewpoints/personal-finance/tax-bre...
      - wtracy 5y ago
        Sure the donation isn't taxed, but why wouldn't the original (fraudulent) sale be taxed? Selling an item at auction and buying it yourself isn't exactly a charitable contribution.
- ThrustVectoring 5y ago
  Donating assets to charity is not a realization event under US tax law. This is why donor-advised funds are a thing - this rule applies to publicly traded securities, which means you can donate appreciated stock to a DAF and have the fund distribute cash to charity on your behalf, avoiding the capital gains you would incur if you normally sold appreciated stock and donated the proceeds.
  - AnthonyMouse 5y ago
    So I think I'm wrong. I'm doing the math for selling the asset and donating the money. In theory just donating the asset shouldn't make any difference -- either it's a realization and that cancels with the donation, or you're donating at the original tax basis, and either way the net deduction is the original tax basis. Because otherwise it's double counting and you get all kinds of bizarre incentives and rich people not paying any taxes. For example, if you bought $1 of a stock that appreciated to $1000 and they increased the capital gains rate to 60%, you wouldn't pay any taxes. The IRS would take in less money from the higher rate. Because even if you don't care about charity at all, you'd donate half the stock to a charity when you go to sell the other half and keep 50% of the money instead of 40%. The IRS would get nothing instead of whatever they got at the lower rate. But the tax code is full of bizarre incentives and rich people not paying any taxes, so apparently this is one of them. (Which at least has the benefit of encouraging charitable donations.)
    - ThrustVectoring 5y ago
      Yeah I agree that it's weird, unintuitive, and not how the ideal tax code should work. It shouldn't matter whether you or the charity sells the stock. Similarly, it shouldn't matter whether you or your heirs sell your stock, but it does, and that's a whole other can of tax optimization worms. This is because the cost basis of assets "steps up" on the owner's death to the fair market value at that date - without any capital gains owed. So if you own $10m of non-dividend paying stock, you can comfortably borrow and spend $200k/yr against it, pay no income or capital gains taxes, and when you die your heirs don't owe any capital gains either and can sell off a portion to repay the loan.
deleted 5y ago
[deleted]

In the above example you pay capital gains on the one (1) $20m initial painting that allows you to then donate N "equal value" paintings. So you can dilute the capital gains % indefinitely (1/N).

AnthonyMouse 5y ago

But your tax basis in the other paintings is still $1M. If you donate them claiming they're worth $1M, you don't get a $20M deduction. If you claim they're worth $20M then transferring them is a realization event and you owe capital gains on $19M. Then you get a $20M deduction which cancels out the capital gains and leaves you with just the original $1M deduction for what you actually paid, right? What people really do this for is insurance fraud. Buy some paintings for $1M each, get them appraised and insured for $20M each, then somebody "steals" them or you have a convenient structure fire and make the N*$20M insurance claim.

sbelskie 5y ago
Unless paintings are different than other assets commonly donated (e.g. stocks), this doesn’t sound right. If I donate a stock that has appreciated in value, I pay no capital gains tax and am still able to deduct the full market value of the stock (up to certain limits).
toast0 5y ago
As another poster said, assuming paintings are treated like stock, as long as you've held it for more than one year, donating an aprechiated asset is magic. In this example, you get a $20M deduction and you don't have to realize the $19M gain. Depending on how the shill purchase in the hypothetical is arranged, you might have realized a gain there... but then again, maybe you just pay the auction fees.
- ThrustVectoring 5y ago
  EDIT: this was wrong, did research and you actually have to hold for a year Original: Holding a year or not doesn't matter for donating appreciated assets, AIUI
  - Bedon292 5y ago
    If you don't hold it for the year you still don't realize the capital gains, but you only get to deduct the cost basis. After a year you get to deduct the current value.
devoutsalsa 5y ago
> If you claim they're worth $20M then transferring them is a realization event and you owe capital gains on $19M. Then you get a $20M deduction which cancels out the capital gains and leaves you with just the original $1M deduction for what you actually paid, right? Nope. Think of it this way: - you lobby government to make charitable donations tax deductible, meaning you can reduce your income by the stated value of the donation - you use the auction house hack to inflate the value of the painting from $1_000_000 USD to $20_000_000 USD buy buying it from yourself - No one will buy your painting for $20_000_000 USD, so it's not really worth that in the open market, but the art museum (in your backyard & founded by you) will give you a receipt stating the art is worth $20_000_000 USD - Unless you reduce your income, your tax rate is 50%, so you donate the inflated art piece (to your art museum in your backyard), give yourself a receipt for the donation - You attach that receipt to your tax return, lowering your taxable income from $A_LOT to $A_LOT minus $20_000_000, which at a 50% tax rate saves you $10_000_000 in taxes
- wtracy 5y ago
  - you use the auction house hack to inflate the value of the painting from $1_000_000 USD to $20_000_000 USD buy buying it from yourself Isn't that a realization event right there? Obviously, the described scheme could still work if you sold one painting to yourself, and then donated N paintings based on that valuation.
  - devoutsalsa 5y ago
    "The federal tax code allows you to contribute long-term appreciated securities—such as stocks, bonds, and mutual fund shares—directly to a charity without paying capital gains tax on the appreciated value, as you would if you sold it first and then contributed cash to the charity." [1] [1] https://www.fidelity.com/viewpoints/personal-finance/tax-breaks-for-charitable-giving https://www.fidelity.com/viewpoints/personal-finance/tax-bre...
    - wtracy 5y ago
      Sure the donation isn't taxed, but why wouldn't the original (fraudulent) sale be taxed? Selling an item at auction and buying it yourself isn't exactly a charitable contribution.
ThrustVectoring 5y ago
Donating assets to charity is not a realization event under US tax law. This is why donor-advised funds are a thing - this rule applies to publicly traded securities, which means you can donate appreciated stock to a DAF and have the fund distribute cash to charity on your behalf, avoiding the capital gains you would incur if you normally sold appreciated stock and donated the proceeds.
- AnthonyMouse 5y ago
  So I think I'm wrong. I'm doing the math for selling the asset and donating the money. In theory just donating the asset shouldn't make any difference -- either it's a realization and that cancels with the donation, or you're donating at the original tax basis, and either way the net deduction is the original tax basis. Because otherwise it's double counting and you get all kinds of bizarre incentives and rich people not paying any taxes. For example, if you bought $1 of a stock that appreciated to $1000 and they increased the capital gains rate to 60%, you wouldn't pay any taxes. The IRS would take in less money from the higher rate. Because even if you don't care about charity at all, you'd donate half the stock to a charity when you go to sell the other half and keep 50% of the money instead of 40%. The IRS would get nothing instead of whatever they got at the lower rate. But the tax code is full of bizarre incentives and rich people not paying any taxes, so apparently this is one of them. (Which at least has the benefit of encouraging charitable donations.)
  - ThrustVectoring 5y ago
    Yeah I agree that it's weird, unintuitive, and not how the ideal tax code should work. It shouldn't matter whether you or the charity sells the stock. Similarly, it shouldn't matter whether you or your heirs sell your stock, but it does, and that's a whole other can of tax optimization worms. This is because the cost basis of assets "steps up" on the owner's death to the fair market value at that date - without any capital gains owed. So if you own $10m of non-dividend paying stock, you can comfortably borrow and spend $200k/yr against it, pay no income or capital gains taxes, and when you die your heirs don't owe any capital gains either and can sell off a portion to repay the loan.

deleted 5y ago

[deleted]