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Songwriters Selling Rights To Copyrights Can Now Claim a Capital Gain, Rather Than Ordinary Income, And Pay Lower Taxes.

The recently-passed Tax Increase Prevention and Reconciliation Act of 2005 (signed into law on May 17, 2006) gives songwriters a special tax break when they sell the copyright to a song they authored. Songwriters can now claim the sale of a song as the sale of a capital asset, rather than reporting the proceeds received from the sale as ordinary income.

Today, the capital gains tax rate is 15%. If a royalty is collected each time the song is played and the copyright remains the property of the songwriter, the royalties are still treated as ordinary income. Ordinary income can currently be taxed as high as 35%.

Songwriters argued this tax change is only fair because producers who sold the rights to songs were allowed to treat the songs as capital assets and pay lower capital gains tax rates.

Previously, songwriters, often self-employed, were considered to have earned the income through their work and labor. Thus, the sale of a song was considered ordinary income. That was considered true, whether the songwriter collected a royalty forever or whether the copyright to the song was sold for a one-time payment.

Now songwriters who sell the copyrights to their works will be able to receive more after-tax money from the sale. This will encourage songwriters to sell the full rights to their works.

Can We Predict A Change In The Tax Treatment On The Sale Of Other Copyrights?

Authors who sell the full copyright to one of their books will still have the income received from the sale treated as ordinary income. There is no change for book authors. This tax change only applies to songwriters. Most authors retain the rights to receive royalties for their books throughout their lifetime and such a tax change might have little benefit to them.

If such treatment were extended to book authors selling the full copyrights to their works, this would help publishers who wished to acquire full copyrights. It will be interesting to see if writers' associations follow the lead of the songwriters' associations and seek capital gains tax treatment for the sale of book rights.