Art financing has been around for decades in TradFi, but art-backed loans in particular have seen a rise in popularity in the last years as a strategic financial tool. In 2021, the sector was worth between $24bn and $28.2bn.
“Popular” might be an odd word to use here — this is not a service the masses have been rushing to their banks to adopt. Most people may never even have heard of it. Historically, it has been a tool available only to the super-wealthy.
In this post, we’ll explore why the wealthy choose art loans as part of their financial and investment strategies. The basic premise is simple: art-backed loans allow individuals to access capital while retaining ownership of their valuable art collections.
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Sound familiar?
Yep: TradFi’s art-backed lending is NFT Lending’s ancestor. Well, they’re both still alive, so…
TradFi’s art-backed lending is NFT Lending’s boomer dad.
By accepting art NFTs as collateral, we at Zharta aim to democratize this financial tool by making it available to a much wider audience.
And by studying how the super-wealthy use art-backed loans to their advantage, you can learn how to use NFT-backed loans in your favor.
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1. Liquidity On-Demand
By utilizing art loans, the wealthy can enhance their liquidity management. Instead of having a significant portion of their wealth tied up in valuable art pieces, they can access capital quickly when needed — especially since this type of loan tends to have fast approval processes.
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2. Portfolio Diversification
Art loans provide an opportunity for the wealthy to diversify their investment portfolios beyond traditional assets.
By allocating a portion of their wealth to art, they can benefit from potential appreciation and reduce their exposure to market fluctuations. Art offers a unique asset class that can act as a hedge against traditional financial markets, enhancing portfolio resilience.
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3. Preserving Assets
For individuals with substantial wealth tied up in illiquid assets, such as real estate or businesses, art loans offer a means of accessing capital without selling.
This preserves their capital while enabling them to leverage their art collection for various financial needs, such as funding new ventures or seizing investment opportunities.
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4. Tax Planning
Liquidity acquired by selling the art would be considered income and be taxed as such. Not so with loans — they need to be repaid, after all, and may only be considered income if the debt is canceled.
In certain jurisdictions, the interest paid on art loans can be tax-deductible.
These features allow borrowers to optimize their tax planning strategies and potentially reduce their overall tax liabilities.
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5. Estate Planning and Wealth Transfer
Art loans can play a role in estate planning and wealth transfer strategies. By using art loans, the wealthy can unlock the value of their art collections while still maintaining the family’s art legacy.
The heirs will further benefit from a step-up in the cost basis of those assets.
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Takeaways
TradFi and DeFi might feel like worlds apart, but just as with humans and their ancestors, their skeletons are not that different (or at least, not yet).
While it won’t be a 1-to-1 comparison, you can learn from what has been proven to work in TradFi and use it in your DeFi journey. DeFi’s history is still so short that any “tried and true” strategies are likely to have been “tried” a handful of times. TradFi, however — TradFi has got stories to tell. A lot of them. Don’t let it corner you at Christmas dinner.
It is fitting that we should do so individually. Isn’t that what DeFi is, after all — at a global scale?
Looking at TradFi, taking what works, discarding what doesn’t — and using the result to shape our future.
Important Note: This content is meant as one more reference for you to use in your research and not as financial advice. A good financial plan needs to be tailored according to your situation and goals; there is no one-size-fits-all approach, and that’s not what we set out to explore here. Furthermore, please remember that taxes and their legal framework vary according to where you live.
