Thursday, January 23, 2014

Tax Break for Songwriters and Musicians

Writers and artists who sell their own works pay taxes on their income of up to 40% (plus the 15% self-employment tax).  But songwriters and musicians who sell their own musical works or copyrights pay taxes of only 15% to 20%, by recognizing capital gains instead of ordinary income.  The songwriters and musicians also do not have to pay the self-employment tax on their capital gains.

Thanks to lobbying from the Nashville Songwriters Association International, the songwriter-musician capital gains tax break was added to the Internal Revenue Code on May 17, 2006, but initially only for a period of 5 years.  A mere 6 months later, the tax break was made permanent by the Tax Relief and Health Care Act of 2006, in order to help the health of songwriters and musicians everywhere.
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If the songwriter or musician loses money on a project, he or she may recognize an ordinary loss (instead of a capital loss) that provides further tax savings.  Songwriters and musicians therefore have the best of all tax worlds compared to all other artists, as long as their work is sufficiently "musical" to qualify for the tax break. There is no authority as to whether One Direction is considered music for tax purposes.

§ 1221 Capital asset defined.
(a) In general.  For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include—
(1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; ***
(3) a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—
(A) a taxpayer whose personal efforts created such property,
(B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or
(C) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B); ***
(b) Definitions and special rules. ***
(3) Sale or exchange of self-created musical works.  At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3).

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