Entertainment Law Reporter
June 2006 Volume 28 Number 1

Tax Increase Prevention and Reconciliation Act permits songwriters to treat songs as capital assets, so copyright assignments will be taxed at lower capital gains rates

There’s a songwriter-friendly provision buried deep inside the newly-enacted 345-page Tax Increase Prevention and Reconciliation Act. It allows songwriters to treat their own songs as “capital assets,” something that tax law specifically previously prevented them from doing.

Though “capital asset” sounds a bit industrial for anything as creative as a song, the provision is a boon for songwriters, for this reason. In the past, songwriters were required to pay taxes on the money they received from the sale of their song copyrights (to publishers, for instance) as “ordinary income.” These days, ordinary income is taxed at rates as great as 35%, so conceivably, songwriters could wind up paying taxes amounting to more than a third of their income from the sale of their songs.

Capital assets, by contrast, are taxed at capital gains rates, which these days is just 15% -- less than half the rate charged for ordinary income.

Until Congress made this change in the law, music publishing companies were taxed at capital gains rates, when they sold songs from their catalogs. But songwriters were taxed at higher rates. The new law treats publishers and songwriters alike, which seems only fair. What still isn’t fair, though, is that book authors and visual artists – who also created copyrighted works – still must pay federal tax at ordinary income rates, when they sell the copyrights to their works.

Tax Increase Prevention and Reconciliation Act of 2005, Section 207: Amortization of expenses incurred in creating or acquiring music or music copyrights, Public Law 109–222 (2006), available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_public_laws&docid=f:publ222.109.pdf