Thanks to historically low interest rates and the fervor of investors seeking a new steady stream of income, artists across the spectrum are doing what was once unthinkable -- selling their music catalogs. But the window may be closing soon for musicians hoping to maximize their returns on what's likely their most precious asset.

However, today’s investment environment -- unprecedented in the history of the music business -- may soon change as the Fed looks to raise interest rates in late 2022 or early 2023. Meanwhile, the Biden administration is pushing for tax changes that involve a 2.6% top marginal income tax rate increase (39.6%) and a potential near doubling of capital gains rates for those making more than $1 million per year (43.4%). Whether these proposals come to fruition or not, it’s clear that taxes are likely to rise soon.

With these significant economic factors on the horizon, we are frequently asked by our artist clients “What should I do?”

For recording artists earning meaningful royalties from catalogs in which they have full or part ownership -- who are considering selling before changes to the tax law -- the question of whether to proceed might feel like a double-edged sword. Yet, we crunched the numbers and the answers are both straightforward and convincing.

Of course, recording artists like Bob Dylan, Stevie Nicks and Paul Simon are selling their catalogs now for many reasons: Some are making unique deals that guarantee their music will remain in print with their longtime labels or will be managed by knowledgeable industry insiders. Others are working to simplify their estate. But regardless of motivation, the artists who have already sold their works have been well advised that the combination of low interest rates and the looming rise in the capital gains tax make this an ideal time to sell. Artists who are on the fence about divesting, remember, you’re not getting out of the business. They could be making the right moves to secure their financial future.

Assume that an artist earning an annual royalty of $1.3 million has an offer to sell her catalog for $18 million now, prior to any potential tax law change. That would subject the sale to the current federal long-term capital gains tax of 20%. But what if this artist was contemplating keeping her catalog for emotional reasons, or because she has projects in the works that could significantly impact her annual earnings? Perhaps she’s also concerned about adjusting her life from living off her income to living off investments. To help illustrate how the potential increase in tax rates would impact her wealth, we analyzed how much the royalty would have to increase to offset the likely rise in capital gains tax.

To simplify matters, we assume the offer of $18 million would remain stable year after year. The only two variables that adjust are the annual royalty payment and that Pres. Biden’s currently proposed tax rates go into effect beginning in 2022.

To offset the increase in tax rates, the royalty payment would have to rise from $1.3 million to $8.02 million if the sale of the catalog was delayed by one year. If the artist would rather sell in five years, the annual royalty payment would have to increase to $2.02 million and remain there each year for five years just to break even. And if the projects didn’t go as planned, she’d have to maintain her current income of $1.3 million for nearly 10 years before she’d be in the same financial place as if she’d sold the catalog in the current tax environment.

Watch

For a catalog’s total value to increase, not only would interest rates have to remain low but royalty revenue would need to be on its way up with the buyer believing that number would stay up.  However, historically, the catalogs that have been sold for record prices consist of royalties that have either stabilized or are experiencing minimal decay. Song catalogs that show a rising trend in royalty accruals tend to be newer (created within the last five years) and those often trade at smaller multiples because the earnings history is shorter, and the projected decay is steeper.

Ultimately, low prevailing interest rates and the potential for a capital gains tax hike make this an optimal environment for artists to sell. But before you run to sign on the dotted line, talk to an advisor about additional strategies you can employ to reduce your tax liability and secure your financial future.

Dan Weisman was an artist manager for 15 years and is now a vp and financial advisor at Bernstein Private Wealth Management. Adam Sansiveri is a managing director and head of the Nashville Private Client Group at Bernstein. Stacie Jacobsen is a director in Bernstein’s Wealth Strategies Group. Sansiveri and Jacobsen are co-heads of the Sports, Media and Entertainment Group at Bernstein, a division of AllianceBernstein. AllianceBernstein is a leading global research and investment management firm headquartered in Nashville with $730 billion under management and offices in 51 cities in 25 countries.

This article is for illustrative purposes only; not an advertisement and does not constitute an endorsement of any particular wealth strategy. Bernstein does not provide legal or tax advice. Consult with competent professionals in these areas before making any decisions.

Watch