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How Masterworks Shares Work

As you might expect, the process of turning a physical painting into shares that many people can buy is a bit complicated. In a nutshell, it works like this:

• Masterworks uses its proprietary model to identify good investments that are currently for sale.

• It buys a work of art and creates an LLC (taxed as a partnership) for each piece.

• Masterworks offers $20 shares (minimum $500) in the LLC until all shares are purchased.

• The company holds onto the artwork for three to 10 years, and then sells it for a profit.

• The LLC is dissolved, and the proceeds are distributed to the shareholders, minus any fees.

Since you're essentially paying to be a partner in the company established for each painting, you should know that you'll receive a Form K-1 at the end of the year that you'll need to file with your taxes.

You won't have to pay any fees directly since they're taken out of the eventual sale proceeds, but it's important to be aware of them. Masterworks is relatively expensive: it charges 1.5% per year, plus a 20% fee from the sale profits. This can cut into your return, significantly.

You might wonder what happens to the artwork after it's purchased. As you probably can tell, it doesn't travel around to all of the shareholder's homes like a traveling trophy (sadly). Instead, Masterworks takes ownership of its safety and care, and even has a gallery in New York where its pieces can be displayed.

Finally, you'll need to be prepared to hold onto your shares for the long haul. You don't get any say in when the painting sells. You're leaving that in Masterworks' hands. But if you need to exit early, the company runs a bulletin-board-like secondary market where you can list your shares for sale in case another investor wants to buy them. It might not be as straightforward as selling shares of stocks, however.

How much does Masterworks cost?

Like all investment opportunities, it's important to understand the fee structure before making a commitment. Masterworks fees are similar to investing with hedge funds.

Masterworks does not charge a signup fee but does require a minimum investment of $1,000. The platform also charges a 1.5% annual management fee for all members, which is used to cover transportation, storage, insurance, and administrative expenses. This can be paid with a debit or credit card.

When a painting appreciates and sells, Masterworks charges a 20% commission on any profit gained. While this percentage is admittedly high, it does indicate that Masterworks seeks to only buy a piece of artwork that is likely to appreciate, as they stand to gain a profit from each sale. Despite the slightly high commission percentage, Masterworks clearly stands by their process and is not in the market of ripping off investors - they only profit if you do.

Masterworks features

• Specific artwork selection. If you're a lover of the arts or think traditional investing is a bit dry or uninspiring, Masterworks might offer a much more enjoyable experience. Not only can you invest in a wide selection of classic and highly regarded works of art - you also get to choose the specific artwork you invest in and can become a partial owner of a piece of art.

• Helpful art sales and research reports. Masterworks provides plenty of data on each selection of artwork, making it easier for you to invest in lucrative art pieces. The company provides auction sales report data for any art pieces that were sent to auction, as well as general global art reports recapping the current state of the art market and new art trends.

• Protected investments. Masterworks makes sure your investments are secure, safe, and well-preserved, to ensure maximum appreciation at the time of sale. Masterworks keeps all of their artwork in a temperature-controlled, museum-quality art gallery. Your 1.5% annual fee helps cover the cost of your artwork's preservation and safe-keeping.

• Investor trading platform. Another key feature Masterworks provides is access to an investors trading platform, where you can buy or sell your shares using the company's online bulletin board. If you aren't prepared to wait for Masterworks to sell one of the pieces of art you own shares in, you can trade or sell using this method.

• Cutting-edge algorithms. It's in the company's best interests to ensure your artwork appreciates, which means Masterworks only searches for the top artists and works available through the marketplace. By analyzing buying patterns, new trends, and previous historical appreciation rates, Masterworks is able to bring high performing artwork right to your fingertips.