The IRS has issued final regulations to treat the gain or loss from the sale or exchange of certain musical compositions or copyrights in musical works as a capital gain or loss.
For sales or exchanges in tax years beginning after May 17, 2006, a taxpayer may elect to treat a sale or exchange of musical compositions or copyrights in musical works created by the taxpayer’s personal efforts as a sale or exchange of a capital asset. This means they will be taxed at capital gains rates and not subject to self-employment tax.
The taxpayer must make a separate election for each musical composition (or copyright in a musical work) sold or exchanged during the tax year. The election is made on Schedule D, Capital Gains and Losses, of the appropriate tax form by treating the sale or exchange as the sale or exchange of a capital asset, in accordance with the form and its instructions. An election must be made on or before the due date (including extensions) of the return for the tax year of the sale or exchange.