Art Market Update: Spring 2021

During times of economic crisis, the art market becomes supply-constrained. Buyers want markdowns, sellers balk, and overall business activity drops. In 2020, the art market saw a 30-40% reduction in the total value of art transactions compared with 2019.¹ You might have thought that prices would drop to help supply meet demand. But instead, many collectors took advantage of low interest rates and a buoyant stock market to monetize their collection by borrowing against it. The few works that did come to market were met by strong demand, so prices have held steady. But given the overall market contraction in 2020, it was a challenging revenue year for auction houses, artists, galleries and museums. Collectors — and the value of their collections — came out unscathed. But  the pandemic's impact will likely take another year or so to work its way through the system.

We expect four macro trends will drive an art market recovery in 2021:

Global wealth effect. The art market is a sentiment-driven market. And the most immediate drivers of sentiment are global equity markets. So while Main Street grapples with the coronavirus, the buoyant stock market continues to drive liquidity for the highest wealth tier. This economic surge is driven by an accommodative Federal Reserve (Fed) policy, a historic investment in digital innovation, surprisingly resilient consumer spending, and the tempering of trade war rhetoric across Europe and Asia. This mix is expected to lead the art market to new heights in 2021, particularly in the masterpiece segment.

The Post-Coronavirus Art Market

		The Adjustment Spring 2021	The Recovery Through 2021	The New Frontier 2022 and beyond
	Masterpieces (Primary and secondary market trophy works)	Lower interest rates and robust equity markets have kept prices strong	The masterpiece emerges unscathed	Low interest rate and global growth drives prices steadily higher
	Established artists (w/auction history and/or top gallery representation)	Continued low supply and lack of distressed selling have kept prices more stable than expected	Higher supply of works coming to market resets prices slightly higher	Supply-demand equilibrium stabilizes prices
	Primary market contemporary (no auction history)	Coronavirus restrictions, cancellations of art fairs, and logistics challenges  - expect continued depreciated prices	Galleries shift to "bricks and clicks" model with many artists priced lower	Gallery consolidation and restructuring poses a downside risk for many artist markets

Source: Bank of America Art Services, January 2021.

Digital evolution/revolution

The art world’s digital pivot during the last 12 months has not only reflected the need to ‘go virtual’ due to the pandemic, but is giving rise to an exceptional new form of art. On the one hand we can expect much of the art market to return to its largely 19th-century tactile roots post pandemic. In contrast, the lightning rise of non-fungible tokens (NFTs) shows the elasticity of the market and collector’s interest in ‘newly minted’ categories.

Digital evolution. Despite the steep increase in digital sales in 2020, they only accounted for 18% and 13% of auction sales at Sotheby’s and Christie’s, respectively, in the first seven months of 2020.² Still, the average value of lots sold online more than doubled this year, as collectors bid online at increasingly higher price points.² However, buyers still crave the live theatrical and social aspects of evening sales, and the auction houses benefit from the energy and competition they drive. Expect a return to in-person marquee auctions when the pandemic wanes. We expect the hyper-curated sales—from single-artist-themed sales to collectable sneaker sales — to remain online-only. We believe these sales are here to stay at the lower end of the market.

Galleries with both global presence and a strong digital platform have come out on top. Online art fairs were a necessary stopgap measure during the pandemic, but despite strong VIP Day sales at Art Basel Miami Beach, collectors complain that 2019’s “fair fatigue” phenomenon has morphed into 2020’s “digital fair fatigue.”

Strong private sales to continue. Private sales were at the heart of collector conversations this year, especially as early days in the pandemic rocked the markets. Sotheby’s, for example, reported $1.5 billion in private sales in 2020, up 50% from the previous year’s totals. Private sales will continue to be a strategic sales channel for collectors throughout the pandemic and even post-pandemic, as they offer the ability to transact off-cycle, de-risk and create price controls.

Digital revolution. On March 11, 2021, a non-physical JPG file by Mike Winkelmann, the artist known as Beeple, sold for $69.3 million, in an online auction at Christie’s, making it one of the 30 most expensive works ever sold at auction.³ The artwork was created (or “minted”) less than a month before the auction, and bidding started at $100.³ 22 million people watched the auction online⁴, and over 350 people bid on the work.⁵

The first non-fungible token (NFT) sold by a major auction house, Beeple’s artwork reveals a potential multi-billion dollar secondary market for intangible property—think intellectual property (IP), Global Interchange Format (GIFs), retired trademarks, memes, sports highlights, digital events (like Jack Dorsey’s first tweet), and yes, cat videos. The ownership of the work, a unique piece of digital code, exists on the blockchain, a distributed digital ledger, which gives buyers proof of authenticity and ownership, as well as status. NFT options contracts and index funds now exist, with NFT indexes now trading on platforms like Coinbase, SuperRare and Nifty Gateway. Expect NFT’s to be used as loan collateral in the future, first by peer-to-peer lenders (for price discovery purposes), followed by boutique lenders. 

While NFT art may be a fad, the Christie’s sale signals that the secondary market for intangible assets has now arrived. The sale leaves many open questions about longer term market implications, but for the moment, the status of owning digitally native assets for young tech wealth can be more significant than owning a Picasso (and now almost as expensive).

More museums selling works

The pandemic era has seen a marked uptick in museums selling art from their collections. A temporary policy shift (effective through 2022) by the Association of Art Museum Directors (AAMD) allows for proceeds from deaccessions to be used for “expenses associated with the direct care of collections,” whereas pre-pandemic, they could only be used for acquiring more art.

Even with the loosening of restrictions, museum deaccessioning can result in controversy. This year, the Brooklyn Museum announced that it would sell 12 works to establish a $40 million fund for collection care, which was approved by the board and curators. By contrast, the Baltimore Museum of Art’s deaccession announcement was met with pledge withdrawals, board resignations and a petition to the state government to block the three sales.

Many museums are looking for redundancy in their collections to fund collection care and/or to rebalance their collections with underrepresented artists. Although deaccessioning can be a solution for some institutions, leadership should have a strategy to manage several key risks in the process:

Our recommendation: Don’t go it alone. Institutions will be best served by working closely with their trusted team of advisors—including fiduciaries, philanthropic advisors, art professionals and legal counsel—to help them navigate this complex, multifaceted process.

Tax/planning issues

Collection management. 2020 saw an acceleration of individuals moving from high-tax states to low- or no-tax states. This movement also reflects a concern about the coronavirus and social unrest in more densely populated areas. Collectors who are considering such a move should ensure that they engage collection management specialists to assist with the movement of their collections — from packing, to moving, to re-installation — as well as appropriate insurance coverage along the way.

Sales and use tax. Collectors should consult with their legal and tax advisors to ensure compliance with change of residency requirements, not only for income tax purposes but also for sales and use tax purposes. For example, if collectors move to a state with no income tax, and buy art and put it on the walls of their new home, they should be aware that the sales or use tax in their new state could be significant. Remember: Each state has different rules on mitigating the sales and use tax (for example, exemptions or a number of days of “first use”), and storage of art at free ports does not get you out of state sales and use taxes.

Planning and potential tax changes. Now that the 2020 election is behind us, what should collectors be thinking about when planning for the ultimate disposition of their collection? The Biden administration has proposed a number of tax changes that may affect collectors. Whether any or all of these are enacted, and whether they’ll be retroactive to the beginning of 2021, remains to be seen. These are the issues that collectors should be exploring with their tax attorneys:

1. Income tax. Increase of the top ordinary income tax rate from 37% to 39.6%. A sale of art held for a year or less would be taxed at 39.6%, plus the 3.8% Medicare surtax, for a total federal tax rate on gain of 43.4% for taxpayers with income of $400,000 or more. Add any state income taxes to that.

2. Capital gains tax rate. Increase of the federal long-term capital gains tax rate from 28% to 39.6% for taxpayers with $1 million of income or more. Add the 3.8% Medicare surtax, and the federal tax rate jumps from 31.8% to 43.4%.

3. Estate and gift tax exemption reduction and tax rate increase. The current estate and gift tax exemption of $11,700,000 per person is scheduled to decrease to $5 million (indexed for inflation) on January 1, 2026. A Democratic unified government might accelerate that decrease to 2021 or 2022. Additionally, the current 40% gift and estate tax rate may also be increased.

4. Restrictions on valuation discounts. Many planning techniques are structured to use valuation discounts. Under the Obama administration, the Treasury issued proposed regulations that would restrict the use of such discounts; those regulations were withdrawn by the Trump administration, but the Biden administration might reinstate the proposed regulations.

5. Elimination of basis step-up. Under current law, the basis of assets is stepped up to fair market value at death, and the decedent’s heirs only recognize gain on post death appreciation. The Biden administration has proposed: (1) carryover of the decedent’s basis to the heirs; (2) the decedent’s estate would owe capital gains taxes on appreciated assets purchased during the decedent’s lifetime at the time of the decedent’s death; and (3) a gift of appreciated assets during life would result in capital gains tax at the time of the gift. Any or all of these proposals could increase and/or accelerate capital gains tax liability and affect wealth transfer planning.

6. Charitable income tax deductions. Some good news! The increased charitable income tax deduction of up to 100% of a donor’s adjusted gross income (AGI) passed as part of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") has been extended into 2021. This applies only to cash gifts made to public charities (not a donor-advised fund or private foundation), and does not apply to donations of works of art; in which case the income tax charitable deduction is limited to 20% of donor’s AGI for works donated to a public charity. 

In 2021, the art world continues its evolution through an unprecedented period of transition and innovation. Bank of America Art Services looks forward to helping you navigate the market as the new art ecosystem emerges post-pandemic.

To learn about Bank of America Private Bank’s extensive art services, visit privatebank.bankofamerica.com/Art or call Evan Beard at 646.855.1107.