Masterworks Review [2024]: Steep Fees Dampen Fine Art Investing

What is Masterworks?

Masterworks is an investing platform that lets you buy shares in high-value artworks created by well-established artists. Founded in 2017, the New York City-based company aims to open up the world of fine art investing to a wider audience.

Masterworks utilizes a specialized research team that uses proprietary data to choose and buy artworks that they project have a high potential to increase in price. As of June 2024, the company purchased 419 artworks and sold 23 of them. The return on the sold artworks ranged from 4.1% to 77.3%, with 10 paintings achieving returns above 20%.

Available assets	Fractional shares of high-value paintings
Minimum investment	$15,000
Fees	1.5% annual management fee 11% upfront payment fee 20% profit sharing cut 14.5% to 26% commission fee
Best for	Experienced investors who can lock up $15,000 per share for 3 to 10 years

Who is Masterworks best for?

Masterworks aims to hold artworks for 3 to 10 years before selling them privately or at auction. This means that the platform is best suited for investors who are comfortable with long-term investments, have a passion for fine art, and are willing to pay a premium for the unique fractional ownership structure.

Given its $15,000 minimum investment per painting share, Masterworks is realistically only accessible to investors with a significant amount of money to tie up long-term. The platform doesn’t require you to be an accredited investor, but you still need the money and experience needed for this form of alternative investing.

How Masterworks works

To invest with Masterworks, you first request an invitation on the platform’s website and set up a phone consultation to discuss your potential investment. While this may seem like a hassle, I was actually able to schedule a call that was less than two hours away.

I spoke to Ivan L. of Masterworks who did a great job at explaining how the platform lets me buy fractional shares in carefully selected artworks.

In simple terms, Masterworks places each painting it buys in a limited liability company (LLC) and files the appropriate offering paperwork with the Securities and Exchange Commission (SEC).

When you buy a share of a painting, what you’re actually buying is a share of the LLC that owns the painting. Masterworks stores the paintings in a secured facility during its holding period of 3 to 10 years.

The ultimate goal is to sell the artwork to a private collector or through an auction house. After a sale, the profits are split proportionally among shareholders.

Masterworks fees

The big catch with Masterworks, in my opinion, is its various fees that can eat into potential profits:

• 11% upfront payment on your initial investment
• 1.5% annual management fee
• 20% commission on gross profits when a painting sells
• 14.5% to 26% auction house commission (charged by Masterworks when a work is sold privately)

Here's how the costs could add up: Say you invest $15,000 for a 10% share of a $150,000 painting. Right off the bat, Masterworks charges an 11% upfront payment fee, so $1,650 of your investment goes to fees instead of equity. Over a 5-year hold, you'd pay about $1,110 in management fees (1.5% of $14,850 annually).

If Masterworks then sells the painting for $225,000, representing a 50% profit, your 10% share would be $22,500. But Masterworks takes a 20% cut of the $75,000 profit, leaving you with $21,000. Finally, you pay a 20% commission on the sale price, either to an auction house or to Masterworks. That's another $4,500.

When all is said and done, your profit would be about $1,500, and your take home would be $16,500. This represents a 10% gain on your initial investment, which is significantly lower than the artwork's 50% appreciation and in line with average returns on stocks, albeit with a much higher risk.

What’s even more shocking is that if this painting were to sell for a 20% gain instead, you would end up losing $600 after all the fees.

Artwork taxes

The Internal Revenue Service (IRS) typically taxes artworks and paintings at its collectible gains rate, which is capped at 28%. This means that if you sell a painting for a profit, you'll owe a federal long-term capital gains tax of up to 28% on the profit you make. This compares to a cap of 20% on long-term capital gains tax for stocks.

For example, if you made a $6,000 profit on an artwork investment, you’d pay $1,680 in federal taxes. Keep in mind that some states may impose additional taxes. Masterworks will send you a tax form detailing your portion of the net proceeds and cost basis after a painting is sold. You can include this form with your tax filing in the year you receive it.

Masterworks secondary trading market

While you can’t end your investment through Masterworks in an artwork until it’s sold, the platform offers a secondary trading market. This market allows members to buy and sell shares of artwork with other participants.

This secondary market could help you cash out of an investment before Masterworks sells the actual artwork. This trading market operates with zero trading fees, and it enables you to view pricing data and analyze trends. Orders placed on the secondary trading market are on a good-til-canceled basis, meaning they remain open until you cancel them or a trade is executed.

Masterworks has about 950,000 members.

Alternative investment platforms to consider

Masterworks may not be the best choice for you. Maybe Masterworks' fees or fine art, in general, aren't your cup of tea.

I enjoy dipping my toes into different markets and exploring new platforms and investment opportunities. Since I don’t have enough cash to invest $15,000 or more in a single investment, I prefer platforms with small entry barriers.

For example, In January 2024, SoFi Active Invest¹ <p><b>INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED •&nbsp;</b><b>MAY LOSE VALUE</b></p> <p>Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA(<a href="https://www.finra.org/">www.finra.org</a>)/SIPC(<a href="https://www.sipc.org/">www.sipc.org</a>).</p> began offering alternative investments in real estate, commodities, and more with a $500 minimum investment.² <p>Investing in alternative investments and/or strategies may not be suitable for all investors and involves unique risks, including the risk of loss. An investor should consider their individual circumstances and any investment information, such as a prospectus, prior to investing. Interval Funds are illiquid instruments, the ability to trade on your timeline may be restricted. Brokerage and Active investing products offered through SoFi Securities LLC, Member FINRA(<a href="www.finra.org" style="background-color: rgb(255, 255, 255);">www.finra.org</a>) /SIPC (<a href="www.sipc.org" style="background-color: rgb(255, 255, 255);">www.sipc.org</a>).</p> If art is your cup of tea, you might like what Public has to offer. This platform gives you access to music royalties investments for as low as $10.

SoFi Active Invest

One solid alternative to Masterworks is SoFi Active Invest, which offers traditional investments and fractional shares³ <p>There are limitations with fractional shares to consider before investing. During market hours fractional share orders are transmitted immediately in the order received. There may be system delays from receipt of your order until execution and market conditions may adversely impact execution prices. Outside of market hours orders are received on a not held basis and will be aggregated for each security then executed in the morning trade window of the next business day at market open. Share will be delivered at an average price received for executing the securities through a single batched order. Fractional shares may not be transferred to another firm. Fractional shares will be sold when a transfer or closure request is initiated. Please consider that selling securities is a taxable event.</p> of a range of alternative assets, including real estate, foreign currencies, and more. Most alternative investments on the platform have a minimum investment of $500. SoFi® charges a 0.50% purchase fee for its alternative funds, making it a cost-effective way to add unique investments to your portfolio.

Visit SoFi Active Invest or learn more in our SoFi Active Invest review.

Stash

Unlike Masterworks, which focuses solely on blue-chip artwork, Stash is an investing app that allows you to buy fractional shares of stocks and ETFs⁴ <p class="">Before investing in any exchange-traded fund, consider your investment objectives, risks, charges, and expenses.<br></p> for as little as $1. This makes it more accessible than Masterworks for people who are new to investment or have limited capital. Stash also has a monthly fee of $3 or $9⁵ <p> For a complete list of fees please see the <a href="https://cdn.stash.com/disclosures/stride-deposit-account-agreement.pdf" target="_blank" rel="noopener noreferrer">Deposit Account Agreement</a> for details. </p> , depending on your plan. For this fee, you receive investment advice, personal finance guidance, access to automated investing, and more.

Visit Stash or learn more in our Stash review.

FAQ

Masterworks review: bottom line

Masterworks allows you to own shares in iconic artworks normally reserved for the ultra-wealthy. Its fractional ownership model and expert curation make investing in art more accessible than ever.

However, the $15,000 minimum is still out of reach for many investors. The substantial fees, long lockup periods, and speculative nature of art valuation make it a niche platform that is best suited for investors with enough tolerance to handle its potential risks.