Why Are More Performers Selling The Rights To Their Music? Maybe Tax Laws

 

See Primary Wave Turns Up the Volume on Music Deals: Music publisher invests in Paul Rodgers, America song catalogs and plans more acquisitions by Anne Steele of The WSJ. Excerpts:

"There is still an appetite for deals this year given high valuations and uncertainty about timing for possible tax adjustments. A special provision for musicians who sell self-created works means they owe capital-gains tax rates of 20% on the sale. That compares with owing ordinary tax rates of up to 37% each year on the royalty income they get from streaming, licensing and other uses of their works. That artist advantage is unlikely to change in the short term as it isn’t a part of significant pending legislation, but other tax laws could change.

President Biden’s Build Back Better bill, currently stalled in Congress, would impose a 5% tax on adjusted gross income above $10 million and an additional 3% on income above $25 million, and those rates would apply to the capital-gains income that musicians get when they sell their song rights. Under the version passed last year by the House, those increases were slated to start on Jan. 1, 2022, and that effective date could still become law, even if the bill isn’t finished for a while.

Artists who are closing deals this year are taking a risk that their income could be subject to the higher rates. But with the legislation stalled, lawmakers could reconsider that date and other details. They haven’t made any decisions yet."

Bruce Springsteen, for example, recently sold his master recordings and music publishing rights to Sony for $500 million. I assume an artist would not sell their music for less than the amount of future income it would generate.

But that future income would get taxed at 37%. Selling it now means they only get taxed 20%. So that is a good deal for the artists.

The company buying the music could come out ahead if they pay a little less than what the music is worth because the artist does not need the full price. Why not? Because they are getting such a good tax deal they can sell it for less than it is worth.

If your music is worth $100 but you sell it for, say, $90, you still come out ahead. If you earned $100 by keeping the music, you pay $37 in taxes and you are left with $63. But if you sell it for $90 and only get taxed 20%, you pay $18 in taxes. That leaves you with $72, more than $63.