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).
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.
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.
Original: Holding a year or not doesn't matter for donating appreciated assets, AIUI
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
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.
[1] https://www.fidelity.com/viewpoints/personal-finance/tax-bre...
Selling an item at auction and buying it yourself isn't exactly a charitable contribution.
This way you pay cap gains on 19 million but can offset 20 million of charity donations against the gain.
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.)
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.