Tax implications of selling and buying art

Can investor treat a sculpture or a painting acquired as a personal asset for his or her personal pleasure? If one claims so, are gain made, if any, on their sale (painting or sculpture) taxable? It wasn’t until March 31, 2007.

After the modified provisions were put into effect, the gains made from art sale were not considered tax-free any longer. This was the case after an amended definition of capital asset. It widened the list of objects for purpose of computing capital assets.

Now, assets like paintings, drawings, sculptures, archaeological collections and for that matter any art form that one happened to buy or sell are liable to capital gains tax. In fact, the new Direct Tax Code (DTC) - to come into effect from 2012 (April 1, 2012) and currently in the form of a Bill that awaits enactment - has proposed extending the levy of wealth tax to objects such as drawings, paintings, sculptures, archaeological collections and every other work of art.

So what are the implications of the changes? Investment expert Gautam Nayak elaborates in an explanatory article (‘Beyond The Tax Book’; The Mint): “If you happen to hold the sculpture or painting for three years (at least), the gains that you make out of its sales would be considered as long-term capital gains. And the gains would then be computed by indexing the cost applying the cost inflation index.

"The gains will be taxed at 20% - the effective rate probably being less than 20% of the actual monetary gains. This is on account of the benefit of cost indexation. And if you sell a work of art within three years of buying it, the gains then would be termed short-term capital gains. They then would be taxable at normal tax slab rates.”

Also, keep in mind the fact the sales tax (value-added tax, in other words) you would pay on the purchase of an artwork would also form part of cost of acquisition to compute your capital gains made from such transactions.