These are all considered "non-capital" assets and the general rules are as follows:
1. For artwork created by the taxpayer, the gain on sale results in ordinary income (unless the special rule for musical compositions and musical copyrights applies as described below.)
2. For artwork that was purchased and was created by others, the gain is generally taxed under the gain rules for personal property and collectibles--i.e. a long-term capital gain rate of 28% applies.
3. For artwork that was received as a gift from the artist, the self-created rules apply since the gift recipient has a carryover basis determined by reference to the basis of the artist.
4. A letter or memorandum that was prepared for the taxpayer falls under the self-created rules.
A special rule exists for self-created musical compositions and self-created musical copyrights (but not literary copyrights.) A taxpayer may elect to have these items receive capital gain treatment as a "capital" asset, meaning like the sale of a stock with current maximum long-term capital gain tax rates of 15%. Again, the recipient of a gift of a musical composition or musical copyright from the artist who created it may also make the same election. The election is made by reporting it on Schedule D. (Apparently musicians have more clout with Congress than authors do.)
Patents and inventions do not follow the same rules as artwork. A patent will receive capital gain treatment as a "capital" asset (i.e. eligible for the 15% long-term capital gains rate) if the following conditions exist:
1. The patent was held for more than twelve months. 2. The holder is the original inventor or first purchaser (but not acquired by gift or inheritance.) 3. If it was acquired by purchase, the patent was bought before the invention was proven to work. 4. The first purchaser was not a related party or employer of the inventor. 5. The purchase included substantially all the rights.
