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As an investor, you have countless different options to choose from. When investors talk about their portfolios, they are usually talking about stocks, ETFs, index funds or mutual funds.
But the reality is that there are many other asset classes to consider, especially today.
Art as an investment is growing in popularity due to the fact that it has low correlation to the stock market and provides a hedge against inflation.
So, what is artwork investing?
What kind of returns does artwork offer?
How do you even get started with artwork?
In this article, we answer those questions and more. Get ready to explore one of the oldest asset classes in history – art.
Table of Contents
What Is Art Investing?
Investing in art is just what it sounds like. It’s an investment in a piece of artwork.
Like stocks and other assets, the value of a piece of art can rise and fall. This volatility does not follow the stock market, however.
This is one reason why investors may choose to invest in art to diversify into an asset class that does not follow the market. The idea here is that you don’t want the assets within your portfolio behaving the same way. Ideally, if stocks are down, your artwork hasn’t experienced the same move.
When you invest in artwork, you are investing in a tangible asset. This makes it more likely to be a hedge against inflation, another reason to potentially choose art as investment.
But, in the past, this asset class was reserved for the top 1%, or even the 1% of the 1%. That is because the only way to invest was to buy an entire painting, which could cost millions.
Now, thanks to financial technology, there are platforms that let you buy shares of artwork just like stocks.
What Counts As “Art?”
Now, investing in art is not as simple as buying a piece of artwork for your house.
Like any investment, art requires diligent research to understand trends in the art market. For example, understanding which artists are most popular and trendy is a critical insight when buying art.
When looking to buy a piece of artwork, there are a number of factors to consider. The original purchase price and the condition of the work are two very important pieces of information to know.
How Is Art Valued?
In the art world, professional appraisers collectively determine the commercial value of a piece.
So what about artwork that hasn’t had a professional appraiser provide a value? Many artists use comps to try to determine a value. However, the value of a given piece of work depends on many variables.
Although it’s difficult to put a specific value on, value largely comes down to the social perception and intrinsic value of a piece. This is often called the social value of artwork.
- What type of emotion does a particular painting evoke?
- Who is the audience and what are they supposed to feel?
In short, what makes a piece of art count as “Art” is entirely subjective. It’s not like a stock where the value is largely (if not entirely) based on quantitative research, or looking at the numbers.
For more info, check out our full article on how the value of artwork is determined here!
Why Invest In Art?
Aside from bragging rights, or looking to decorate your home with your portfolio, why might you want to own art?
Investing in artwork carries with it a few main benefits:
- Diversification away from traditional investments
- Tangible asset that can hedge against inflation
- Artwork generally appreciates in value
- Investing in art can be fun
- Tax avoidance
Though for many art investors, they also choose to do so because they genuinely enjoy artwork. However, it is important to note that investing in art is far more than simply choosing pieces of art that you like and dislike.
While the sole purpose may not be for wealth building, it can be a definite perk.
Here’s our full guide on diversifying your portfolio into alternative investments like artwork!
Artwork Tax Deferment Explained
You likely have heard of a 1031 exchange. With real estate, investors are able to sell a property and reinvest the capital gains into another property. If done correctly, investors can defer any taxes owed from the sale of the previous property. This method is commonly use to defer taxes and leverage equity in a property.
Art investors have historically been able to do something similar. However, in 2017, with the Tax Cuts and Jobs Act, this provision in the tax code changed. These like kind exchanges are now limited to “real property.”
Because of this, art investors are no longer able to move proceeds from the sale of a piece of art to another piece without taxes owed on capital gains.
However, with this change to tax law came a new break for art investors.
Now, there is an incentive to invest in opportunity zones. If an investor sells a piece of art and moves the proceeds to an opportunity zone investment, then they can defer the capital gains tax from the sale. Furthermore, if the opportunity zone investment is held for greater than 7 years, they can even receive a 15% reduction in the tax owed.
While this still allows for tax deferment and reduction, it requires moving investment dollars from art into a different asset class.
Investing In Art In Times Of Crisis
It is fairly common to see an increase in art investments in times of crisis.
This pattern did not hold true throughout the COVID pandemic as many auctions and other art events were canceled.
However, when the stock market is in a decline and people begin selling off investments, art often sees an up tick. This is because while the stock market and bank rates may decrease, the value of art typically holds its value.
For instance, in 2007 and 2008, the market for artwork increased vs 2005 and 2006.
Additionally, as the market corrected itself after the housing collapse in 2009, artwork saw a sharp decline in auction sales.
Investors flock to artwork during times of peak uncertainty. Then, as the markets appear more safe, they ease back in with their artwork proceeds.
Why Not Invest In Art?
While investing in art can be incredibly lucrative, it is not for everyone.
Artwork tends to be a very long term investment, and this may deter some investors right off the bat.
But other reasons investors may not be excited about art investing include the following:
- Art is typically a highly illiquid investment – or difficult to buy/sell
- Investing in art requires expertise to understand trends and what is currently or going to become popular
- Owning a single painting is very expensive and out of reach for most investors
Most investors do not have art in their portfolio because of this; it’s illiquid and has a high minimum investment.
Artwork isn’t like the stock market, where there are millions of buyers and sellers each day. There is a much smaller market for artwork versus public equities. And unfortunately, you may own a piece of artwork that has gone out of trend. This could result in a situation where no one wants to buy it.
Simply put, if you buy the wrong piece of art as an investment, you might be left with something to just hang on your wall. Most of the biggest artwork investors have hundreds, if not thousands of paintings in their portfolios.
This offsets the risk of having some bad paintings in the mix. But, if you only own 1 paining, you aren’t diversified in the least.
How To Invest In Art
Investing in art can be accomplished in a few ways.
First, and most obvious, you could purchase a piece of artwork from an auction (online or in person), gallery or private collector. Artprice is a leader in art market information. On their site, investors can browse various auction houses and track their favorite artists.
Artprice got started in 1997 and is now a global leader in the artwork marketplace. The company tracks seven standard Art-tracking indexes including Top 100 Artists, European Old Masters, Impressionist Art, Modern Art, Post-War Art, Contemporary Art, and Chinese Art and Artist Indices.
The platform provides investors with millions of data points and information about the art market.
With nearly 800,000 artists in their index and coverage on 1,800 auction houses, investors can easily conduct research on various artists and pieces with accompanying purchase prices.
Now, purchasing a piece of artwork outright may not be the route you are hoping for. This method often requires a large sum of capital and time to conduct research and to travel to an auction or gallery.
There is an alternative method.
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Masterworks is a cutting-edge fintech platform that lets you buy and sell shares of art just like stocks.
Scott Lynn founded Masterworks in 2017. His mission was simple; to create a platform that made investing in art easier.
“Contemporary art has outperformed the S&P for the past 25 years, but there has been no way to invest in it. Masterworks is the first company to offer investment products within the art market.” – Scott Lynn
For many, investing in art is out of reach based in the sum of capital that is needed. The traditional approach would be to purchase a piece of artwork outright, giving you zero diversification.
With Masterworks, you can buy shares of artwork on the site in $20 increments! There is a $500 minimum for your first investment only.
Additionally, you do not have to be an accredited investor to get started.
Masterworks has a simple 4 step process:
- They identify which artists have the most momentum
- Of all artwork they review, they purchase just 5%
- They file an offering circular with the SEC allowing anyone to invest
- Investors will then hold for 3 to 10 years until Masterworks sells the piece
Once a painting is sold, profits are divided up among investors based on share count.
As an investor, you can also sell your shares at any time on the Masterworks secondary market.
The above is a screenshot from our Masterworks portfolio. Be sure to check out our 1 year Masterworks portfolio update here!
Since 2018, they have acquired over 130 assets valued at over $500 million. They’ve also achieved a 15.3% net return.
To learn more, check out our full review of Masterworks here!
Yieldstreet, on the other hand, was founded in 2014, giving it a longer track record of operations.
While the company does offer investors access to art investments, they focus on offering a wide array of alternative investments.
The company was started when founder and CEO Milind Mehere wanted to make alternative investments more accessible to the everyday investor.
While some of their funds require accreditation, others do not. You can also create a custom fund and target particular asset classes more aggressively.
Yieldstreet puts together funds that investors can pick and choose from. For example, here is one of their Artwork Funds.
Yieldstreet has attracted over 400,000 investors and has had over $4 billion invested on their platform.
Since inception, they’ve achieved a 9.6% net annualized return.
Be sure to read our full review of the Yieldstreet alternative investment platform here!
Recently, the investing app Public added alternative investment offerings to their platform via their acquisition of Otis.
Here’s how alternative investments are handled on Public:
- Public’s team of researchers find alternative investments like fine art, collectibles and NFTs that are on trend and at a fair price
- They then purchase the asset and securitize it with the SEC
- Investors then have the chance to purchase shares of the asset
- Once Public acquires an asset, they handle the authentication, insurance, and storage
How Much Does A Piece Of Artwork Cost?
Purchasing a piece of art as an investment can vary dramatically when it comes to price.
You could purchase a piece that you like at an auction or local art gallery for less than $5,000.
Of course, for a piece like that to increase in value, you may have to be patient. Perhaps you invest in a painting done by an up and coming artist. It may take years for this artist to gain traction in the market.
A piece of artwork could also cost in the millions. The current record price is approximately $450.3 million! This was the sale of Leonardo da Vinci’s Salvator Mundi in November 2017, pictured below.
The Scream by Edvard Munch sold in 2012 for $119.9 million, pictured below.
Interestingly, in 2021, an NFT called The First 5000 Days by the artist Beeple sold for $69.3 million. This is currently the record for all NFTs, pictured below.
Of course, the range in price is exceedingly large. The fact is, art can sell for less than $100 or in the millions. And the value of a particular investment can rise and fall based on a number of subjective factors as outlined earlier.
Art Investment Trends
Artwork, like stocks, operates in a market. The art market has its own unique trends and things to be aware of.
In 2020, the market for artwork actually faced its largest decline in 10 years. Though in 2021, the market recovered with a boom.
The total market for 2021 was estimated to be $65.1 Billion. This estimate was up 29% vs 2020. The art market is an aggregate of sales from dealers and auction houses.
The United States, China, and the UK account for 80% of total art sales worldwide. Nearly all artwork sales are done through dealers, auctions, and private collectors.
How Does Digital Art – NFTs – Fit In?
While the art market saw impressive growth in 2021, the market for digital art expanded even faster.
In 2019, sales for digital art was estimated to be worth $4.6 million. In 2021, the figure grew to a staggering $11.1 billion.
Interestingly, 88% of high net worth (HNW) art collectors stated that they had interest in buying an NFT in 2022.
While many HNW collectors have expressed interest in NFTs, the market has definitely cooled off in 2022. After the initial hype wore off, many investors have sold off their NFTs, as well as cryptocurrency holdings.
This major sell off has contributed to the decline of both the value of cryptocurrencies and NFTs.
It’s too soon to tell if NFTs will be a good long term artwork investment.
What Are NFTs?
NFTs are non-fungible tokens.
Non-fungible simply means that an item is not able to be interchanged. For example, a dollar bill is fungible as it can be swapped for any other dollar bill.
An NFT is a record on the blockchain that is tied to a physical or digital asset.
The major benefit of NFTs is that people can easily buy and sell digital assets such as artwork without the worry of fraud.
OpenSea is one of the top platforms where investors can purchase NFTs.
What Are Investment Returns Like With Artwork?
So, how does artwork fare against other investments like stocks or real estate?
According to Masterworks, artwork has actually outperformed other asset classes.
- From 1995 to present, contemporary art has averaged 13% appreciation each year
- Meanwhile, the S&P 500 has averaged 10.2%.
- Real estate averaged 8.9%
- And gold just 7.2%
For their analysis, Masterworks looked at artwork produced after 1945 for all Contemporary Art that was sold at least two times.
Investing in artwork through a fund can greatly reduce the risk involved. If you were to buy a single piece of artwork, you could either gain or lose significantly.
To learn more, check out our full article on artwork investment returns explained!
How To Earn Money With Art Investments
Artwork is a non-yield bearing asset, meaning it doesn’t pay you anything while you own it.
Dividend stocks, for example, pay you dividends while you own them.
Earning money through an art investment is much like owning your house that you live in.
Over time, generally speaking, a piece of artwork appreciates in value, like your house. After owning a piece for some time, you could sell the asset. Upon the sale of the artwork, you would either realize a gain or a loss.
Unfortunately, an investment in art requires time and patience. You are not able to realize any gains until the point of sale.
For a more thorough explanation, check out our article on how to make money investing in artwork here!
How Do Taxes Work With Art Investing?
Art investing is of particular interest to those with a high net worth as a piece of artwork can hold its value over time.
Purchasing a piece of artwork is also a great way to defer tax liability.
However, upon the sale of the asset, assuming another is not purchased, there is a large capital gains tax.
The sale of a collectible comes with a 28% tax rate.
Check out our full guide on artwork investment taxes explained here to learn more!
Risks With Art Investments
Before investing in artwork, it is critical to understand associated risks.
Consider the following before your first artwork investment (not a complete list):
- High cost and transaction fees
- No dividends or other monthly/yearly income
- Possibility for destruction of asset in storage and transportation (or theft)
- High prevalence of counterfeit artwork
- Lack of buyers is possible due to illiquidity
- Difficulty of assessing value of piece (lack of information, or subjective factors)
Like any investment, art comes with its own unique set of risks.
This does not mean you should not invest in artwork, but rather that you ought to be aware of potential risks before getting started.