If your the owner of various musical compositions and copyrights in musical works, you should be aware of a unique opportunity to turn ordinary income into capital gain.
The maximum tax rate on the net capital gain income of an individual is significantly lower than the maximum tax rate on an individual’s ordinary income.
The lower capital gains rate generally is available for gain from the sale or exchange of a capital asset for which the individual has satisfied a holding-period requirement. Capital assets generally include all property held by the individual, with certain specified exceptions. Exceptions from capital asset status applies to:
- copyrighted property,
- literary property,
- musical property,
- artistic compositions,
- letter property,
- memoranda property, or
- similar property held by an individual whose personal efforts created the property (or held by an individual whose basis in the property is determined by reference to the basis of the person whose personal efforts created the property).
Consequently, when an individual who owns copyrights in, for example, books, songs, or paintings that the he or she created (or when an individual to whom the copyrights have been transferred by the works’ creator in a substituted basis transaction), sells the copyrights, gain from the sale is treated as ordinary income, not capital gain.
However, a special rule applies in the case of a musical composition or a copyright in a musical work that you created by your personal efforts or that you acquired under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom the property was prepared or produced. You can elect to treat the sale or exchange of such a musical composition or copyright in a musical work as the sale or exchange of a capital asset. As a result, your gain or loss from the sale or exchange will be treated as capital gain or loss.
You must make a separate election for each composition or copyright you sell or exchange during the tax year, and must make the election on or before the due date (including extensions) of your income tax return for the tax year of the sale or exchange.
You make the election on Form 8949, Sales and Other Dispositions of Capital Assets, by treating the sale or exchange as the sale or exchange of a capital asset.
Please call me at your convenience so that we can examine how this election for self-created musical works applies to your particular situation.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 05012021-1 320-685)