Manatt Entertainment Partner Beau Stapleton and Tax, Employee Benefits and Executive Compensation Attorney Burak Ahmed wrote an article for Bloomberg Tax about how Section 1221(b)(3) of the tax code may continue to impact catalog sales over the next several years.
They explain how musical works had not historically been considered a capital asset, but that changed when various artist groups began lobbying Congress to enact legislation granting songwriters preferential tax treatment on the sale of their compositions. This led to Section 1221(b)(3), which allowed songwriters to treat their catalog as a capital asset at the time of a sale.
“The financial implications of this provision for the songwriter are significant: Hold on to your catalog and pay ordinary income tax at up to 37% on future royalties, or sell to the highest bidder and pay a one-time capital gains tax at the maximum rate of 20%,” Stapleton and Ahmed wrote.
The authors also noted that while this change did not have an immediate impact on the marketplace, it became a driver of the record-breaking catalog sales that took place during the COVID-19 pandemic because it offered an alternative stream of revenue for musicians whose income had previously heavily relied on touring.
Read the full article here.