A collector buys a $40,000 painting in December. The money lands in your operating account, your bookkeeper posts it to sales, and the artist gets a $20,000 check in January. Your books show a $40,000 month, but you earned $20,000. The other half belonged to the artist from the moment the buyer paid.

Booking the full price as your income overstates your profit and throws off every margin you use to price and plan. It can also cost you tax a year early. In New York, it can put you on the wrong side of trust law.

What consignment means on your books

On consignment, the artist still owns the work until it sells. When it sells, you're acting as the artist's agent. That has two consequences for your books.

1. Consigned work isn't your inventory. Keep it off the balance sheet and out of cost of goods sold. Track it in a consignment register that lists the artist, title, date received, agreed retail price, and commission rate.
2. Your revenue is the commission. Record your commission as income. Record the artist's share in a "Due to Artists" liability account until you pay it.

Work you buy outright is different. That's your inventory, and the inventory rules below apply to it.

Where the tax damage comes from

Booking the full price as sales and the payout as an expense looks harmless, because the two net out over time. The problem is that they land in different years.

Example only, not client data: Your gallery is on the cash method. You sell $300,000 of consigned work over the year at a 50% commission. $60,000 of those sales close in November and December, and the artists' $30,000 share of those sales is paid in January.

• If you book gross: $300,000 of sales minus $120,000 of payouts made during the year shows $180,000 of gross profit.
• If you book correctly: $150,000 of commission income, with $30,000 owed to artists sitting as a liability.
• What it costs: $30,000 of income that was never yours gets taxed this year. At an example combined rate of 35%, that's about $10,500 of tax paid a year early, and it happens again every year you have a strong fourth quarter.

Proceeds you collect as the artist's agent generally aren't your income, even on the cash method. Your revenue line is also what your bank and your landlord see, and right now it's double what you earn.

The trust problem

In New York, the artist's share isn't just a liability. Arts and Cultural Affairs Law §12.01 makes you the agent of an artist who consigns their own work, or of the artist's heirs. The work is trust property, and the sale proceeds are trust funds. Neither can be reached by your creditors. The artist can waive the trust on proceeds in writing, except for the first $2,500 of sales in any 12 months. Other states may have similar laws, so check yours.

When artist money sits in your operating account, it gets spent on rent and payroll. If the next month is slow, you owe an artist money you no longer have. In effect, you've borrowed from your artists without a loan agreement.

Owned inventory has its own rules

When you buy a piece, its cost usually comes off your taxes when the piece sells, not when you pay for it. So buying three paintings in December usually doesn't cut this year's tax. Your business may qualify for the simplified small-business inventory method under §471(c) (average gross receipts of $31 million or less for 2025 tax years, $32 million or less for 2026). Under that method, the timing depends on how your books treat purchases, so confirm it with your preparer.

Writing down a piece that has hung on the wall too long is a narrow rule. Under Reg. §1.471-2(c), you can value goods below cost only if they can't sell at normal prices because of damage, imperfections, shop wear, changes in style, or similar causes. Even then, you have to actually offer them at the lower price within 30 days after the inventory date, and you carry the burden of proving it. Thinking a piece is worth less now isn't enough. A dated price cut that the public can see, with a qualifying reason behind it, is.

Three compliance items galleries miss

• Cash over $10,000. If you receive more than $10,000 in cash for one sale or related sales, file Form 8300 within 15 days. Art is a collectible, so in a retail art sale, cashier's checks, bank drafts, traveler's checks, and money orders of $10,000 or less also count as cash. If you file 10 or more other information returns in a year, you have to e-file Form 8300.
• Sales tax on the full price. In most states, the gallery that makes the sale collects sales tax on the full price, not just its commission. Booking only the commission as income doesn't shrink what you owe in sales tax.
• No 1099-NEC for the artist's share. Paying an artist for consigned work is paying for property, not services. A fee you pay an artist for a commission, a talk, or an installation is for services, and it may need a 1099. Get a W-9 from every artist at intake so you're covered either way.

What to do

1. This week: set up a "Due to Artists" liability account and a consignment register. Any accounting system can do both at no cost.
2. This month: open a separate bank account for artist proceeds. Deposit every consignment sale there, move your commission to operating when the sale clears, and pay artists from that account. That one step ends commingling.
3. Before December 31: reclassify this year's consignment sales from gross to commission, so your tax projection uses your real income.
4. At every intake: get a signed consignment agreement with the commission rate and payment terms, plus a W-9.
5. At year-end: reconcile the artist account to the Due to Artists balance, count your owned inventory, and document any markdown offers made within 30 days of year-end.

If your sales line includes the artist's share, your income, your margins, and probably your tax bill are overstated. Book a 30-minute Tax Leak Review, and I'll show you what your gallery actually earned.

Tristan D. Taylor, EA

​tristandtaylor.com​
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