The proposed tax law- what will change
Under the proposed law, a songwriter who sells their catalogue of songs will pay 15% capital gains tax rate on the sale price of the catalogue. Under existing law, they paid the same income tax rates as they did on royalties earned from their catalogue.
What will not change
Under existing law, songwriters pay ordinary income tax and self employment (social security) tax on royalties earned from their catalogue each year. That part did not change.
Remember the basics
Royalty income and related expenses are reported on the songwriter’s federal income tax return form 1040 schedule C (not on schedule E). After expenses are deducted from royalties, the songwriter pays ordinary and self employment tax on the net royalty income.
The only time annual royalty earnings are not subject to the self employment tax is when the catalogue of songs was purchased by, instead of written by, the royalty earner, as in the case of the publishing companies. In that case, the catalogue is considered a capital asset. When and if the catalogue is sold by the publishing company, the sale is a capital gain and will qualify for the 15% capital gains rate on the excess of the sale price of the catalogue over what was paid for the catalogue.
So royalties earned, whether by a publishing company or by a songwriter, are taxed at ordinary income tax rates. The songwriter, in addition to paying the income tax on royalties earned, also pays the self employment tax. The sale of the catalogue itself is a capital gain and in a different category of tax than the royalties. The tax on that capital gain, in the songwriter example, is what changed for the better. Everything else stays the same.