Art as an investment – ​​What artists and collectors should know about taxes

Taxes can be a tricky subject for people working in the art market. It's time we shed light on the most important points with the help of renowned expert Peter Schmitz – Managing Director at Buhl Data Service GmbH .

For artists

Artists living in Germany are subject to income tax if they earn income from "self-employed or freelance work" or from "employment" as an employee.

If you plan to become self-employed as an artist, you must register with the tax office. Within one month of starting your business, you must complete and submit a specific form electronically – the “Questionnaire for Tax Registration” . This questionnaire is also important with regard to value-added tax (VAT).

Because you will be asked for your estimated turnover there. This is important for determining your VAT classification as a small business or a standard-rate taxpayer.

You are registered with the tax office under your personal tax identification number (IdNr.), which was assigned to you by the tax office at birth. You can find your IdNr. on previous income tax assessments or wage tax statements. If you cannot find it at all, you can request your IdNr. from the Federal Central Tax Office.

If you are self-employed, you are required to file an annual income tax return. This return adds up all income from all sources and taxes the total amount. Only then – after further calculations, for example, regarding special expenses – will you determine whether you owe any additional taxes or receive a tax refund.

If you are employed as an artist, you pay income tax. This is deducted monthly from your salary by your employer and paid directly to the tax office. At the end of a calendar year, you can reclaim any overpaid taxes by submitting an income tax return to the tax office.

Tip: As an employed artist, you should definitely file a tax return . On average, you'll receive a refund of €1,700 from the tax office. Tax software , such as WISO Steuer , makes it possible to file a tax return for all types of income.

Losses at the beginning of self-employment

It's perfectly normal to incur losses at the beginning of your business, meaning your income will be lower than your expenses. This is primarily due to the initial investments required to start a business, such as tools, materials, equipment, or technical facilities.

If the calculation of income from self-employment results in a loss, the tax office reacts with a so-called provisional assessment. The explanatory section of the tax assessment will then state, for example:

The income from self-employment is provisionally determined, as the intention to make a profit cannot yet be conclusively assessed

This means that the tax assessment is not yet final in some cases and can be subsequently amended by the tax office.

The tax office will tolerate initial losses for a while, but not indefinitely. It's important to understand that the tax office looks at a longer period – usually several years. Can the losses you incurred at the beginning be offset? Or will your expenses accumulate over the years?

If, after several years, it turns out that your activity is not generating any profit and that you are doing nothing to improve the situation, the tax office will retroactively disallow your losses and classify your artistic activity as a "hobby" or "leisure activity." In that case, you may have to pay back taxes and interest years later.

Your artistic career is developing well and you are able to sell your works

If you sell your work, you are subject to VAT. You must issue invoices, show the VAT on them, and then pay it to the tax office. Regarding the VAT rate, there is a special regulation in Germany.

The standard VAT rate in this country is 19 percent. However, to promote art and culture, there is a reduced VAT rate of 7 percent. As an artist, you can apply this reduced rate

• if you sell your art yourself
• when you grant or transfer usage rights to your works

At the same time, you can deduct the VAT you previously paid on all business-related expenses. This is called input tax deduction. If you have paid more VAT than you have collected, the tax office will refund the difference.

Whether or not you are liable for VAT also depends on the price category in which you sell your art. For beginners, it can be advantageous to avoid VAT altogether and thus take advantage of the small business exemption.

Note: When gallery owners or art dealers sell artworks to collectors, 19 percent VAT is charged.

What applies to new business founders?

For newly founded businesses without a previous year's revenue, the only relevant factor is whether they expect to exceed the revenue threshold of €22,000 in the current year; if so, they are exempt from VAT. The €50,000 threshold is therefore irrelevant in the founding year.

Should your actual revenue turn out to be higher, there will be no consequences. You will not have to pay any additional sales tax. In the aforementioned "questionnaire for tax registration," you can also indicate that you wish to waive your small business status entirely.

For collectors

Art and antiques are not just a passion, but also an investment with tax advantages. This is particularly important for collections from a tax perspective.

Holding period of at least one year

Anyone selling a work of art should be aware of the one-year holding period and hold the artwork for at least a year. If less than a year passes between the purchase and sale of a work of art, the difference between the sale price and the purchase price is subject to taxation. Profits of up to €1,000 per year are tax-free.

The profit is then subject to the individual's personal tax rate, which is calculated based on their tax return. The taxes due can be as high as 45 percent. After the one-year holding period, the sale is tax-free – regardless of the actual profit.

It should be noted that the €1,000 limit applies to all sales within a single year. For example, if you sell three paintings for €550 each, the entire profit is taxable (€1,650 minus the purchase price).

If you sell many items from your private collection within a short period, the tax office may suspect commercial activity – and then both income tax and sales tax will be due. This can be the case with as few as three sales within a year.

When does the one-year period apply?

You should keep the one-year speculation period in mind when selling the following items:

• Works of art (paintings, sculptures, prints, etc.)
• Jewelry
• Antiques and classic cars
• Coin and stamp collections
• precious stones and precious metals
• Gold coins and gold bars

Important: If you generate a regular income with a work of art, for example because it is loaned to a museum for money, the speculation period is extended to 10 years.

Is there an intention to make a profit?

Even the systematic purchase of art with the intention of generating profit can trigger tax liability. The decisive factor here is the intention to make a profit: if you aim for an overall profit over a longer period, the tax office may assume a commercial activity. Whether a business has actually been registered is irrelevant.

If the intention to make a profit cannot be proven, the tax office usually considers this a hobby or private asset management. However, the resulting profits may still be subject to capital gains tax.

However, you can then also claim any losses incurred within the one-year period between purchase and sale for tax purposes.

Joachim Rodriguez y Romero

Owner and Managing Director of Kunstplaza . Publicist, editor, and passionate blogger in the fields of art, design, and creativity since 2011. Graduated with a degree in web design from university (2008). Further developed creative techniques through courses in freehand drawing, expressive painting, and theatre/acting. Profound knowledge of the art market gained through years of journalistic research and numerous collaborations with key players and institutions in the arts and culture sector.

www.kunstplaza.de