Finally, a break for the starving artist! Well, a tax break that is. And this tax break is not for all artists, but only for songwriters.
Generally, those who purchase and sell the rights to songs or music catalogs get capital gains treatment on the sale. However, when a songwriter sold a song, it was taxed at higher ordinary rates instead of capital gains rates. Songwriters fought to have the same treatment as those publishers or investors who received capital gains treatment. As a result, the Songwriters Capital Gains Tax Equity Act of 2006 amended the Internal Revenue Code to include certain “self-created musical works” as capital gains assets. This means when a songwriter sells the rights to a song or music catalog, they may be eligible to be taxed at lower capital gains rates rather than ordinary tax rates.
So, what constitutes a self-created musical work? This would be a musical composition created by the personal efforts of the songwriter. Keep in mind, this only includes music with a copyright by the songwriter and would not include music the songwriter was hired to create for a specific job in which the hiring company holds ownership of the created work.
A songwriter or other owner of a musical composition or copyright may decide to donate the musical work rather than sell it. Usually when capital assets are donated to a qualified charitable organization, the donor is able to deduct the fair market value of the asset as a charitable deduction. However, when donating musical compositions or copyrights, the donor must use the donor’s adjusted basis as the charitable deduction rather than the fair market value. So, even if the work was considered a capital asset when sold, the work is considered noncapital for charitable contribution purposes.
Please note the information above is only general in nature and should not be construed as any form of tax advice and should not be relied upon in any way.
By Jill A. Helm, CPA