Bruce Springsteen tells IRS who is boss of Sony’s $ 500 million sale, taxed as capital gain


Bruce Springsteen sold his music rights to Sony Music Group for $ 500-600 million, the biggest deal ever for an artist’s lifetime work. The Wall Street Journal also noted the boss’s good timing and fiscal savvy. This year, the federal capital gains tax rate reaches 20% (although the Obamacare tax of 3.8% often applies as well). Next year, tax increases still seem likely. So cashing in before the law changes seems smart. The rising capital gain rates on the horizon is not just speculation. In early 2021, President Biden proposed a massive 43.4% capital gains tax rate for anyone earning $ 1 million or more. Raising the capital gain rate from 23.8% to 43.4% would have been a staggering 82% increase, and there was a special alarm that the huge tax hike had to be retroactive. A natural reaction to an impending tax hike is to sell quickly before the new law takes effect. But when it was proposed, the rate hike was already in force for sales after April 28, 2021. If you add state taxes like the current California rate of 13.3%, the government gets most of your gain. It was not passed, but other tax dangers still loom. Huge Build Back Better Bill – if passed – will add 5% additional tax on anyone earning income over $ 10 million, and 3% more on income over $ 25 million.

An additional 8% tax on a big sale is, well, huge. Springsteen could have continued to collect royalties for years, but the royalties are taxed as ordinary income. Ignoring state taxes, it’s 37% federally (unless you have to add the additional 5% or 8% proposed by the Build Back Better bill. What’s better than regular income? capital gain, of course, and music creators like Springsteen can still sell at capital gain rates, although this tax break has also been targeted in recent years. Willie Nelson, even going so far as to seize his assets. But the tax code and regulations actually give songwriters a big chance, allowing them to treat the sale of musical compositions or copyright in musical works as a capital gain. Authors do not enjoy this favorable treatment if they sell a book. But if you sell a musical composition or a copyright in a musical work that you create on your own, you may choose to treat it as capital gains property. It is allowed under Article 1221 (b) (3) of the tax code. As with virtually everything in the tax world, there are some technicalities to watch out for. So if your song hits the Top 40, hire someone to observe these details for you. One of them is an election, which you can read on 26 CFR § 1.1221-3, which deals with the timing and modalities of the election.

Again, this tax break is only for music, not books or other written work. So if you write the Great American Novel, you will be paying ordinary income tax. The my-novel-is-a-capital-gain argument has been tried without success. After all, most income is ordinary, including payment for services, interest, business profits, dividends, money for winning the lottery, and most other payments. But for generations there has been a big tax break for long-term capital gains, those held over a year. Assuming you are over a year old, if you are selling your house, car, crypto stock, Amazon

shares or other assets, it is a long-term capital gain.

Currently, long-term capital gains tax is progressive: 0% on income up to $ 40,000, 15% over $ 40,000 up to $ 441,450 and 20% on income above $ 441,451 (in some cases add 3.8% Obamacare tax), so at worst, your total tax bill is 23.8%. There are also timing advantages. Like Springsteen, you can normally decide when to sell an asset and on what terms. In contrast, with ordinary income, the implied receipt doctrine of “don’t pay me until January” doesn’t work with the IRS. Essentially, this means that you can’t time your income in most cases. However, if you settle a lawsuit, you can refuse to sign a settlement agreement unless it says the defendant will pay you in installments. Even though it may ring as if you could have gotten the money earlier, there is no implied receipt because you conditioned your signature to receive payment the way you wanted. As for preferring surplus value to ordinary income like Springsteen, many people try to position their legal settlements as capital gain too much.

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