Electing to treat musical works as capital assets.

• Author: Nevius, Alistair M.

The IRS issued final regulations governing how to elect to treat the sale or exchange of a musical work or copyright in a musical work as a sale or exchange of a capital asset (T.D. 9514).

Under Sec. 1221(a)(3), the definition of capital asset excludes certain property held by a taxpayer whose personal efforts created the property. Property that does count as a capital asset under this provision includes copyrights; literary, musical, or artistic compositions; letters or memoranda; and similar property. Thus, any income from their sale or exchange will be taxed as ordinary income and not at the lower capital gain rates.

These listed types of property are also not considered capital assets if they are held by a taxpayer whose basis in the property is determined by reference to the basis of the property in the hands of the taxpayer whose personal efforts created the property.

Under Sec. 1221(b)(3), however, taxpayers who own a musical composition or copyright in a musical work created by the taxpayer (or transferred to the taxpayer by the work's creator in a transferred basis transaction) can elect to have gain or loss from the sale or exchange of the musical composition or copyright treated as...