What is the tax treatment of a sale when a musician transfers all rights of a song to another individual?

When a musician transfers all rights of a song to another individual, the income from this sale is treated as a capital gain. This is because the transfer of rights constitutes a sale of a capital asset. In tax terms, a capital asset generally includes property such as music rights, which, when sold, may result in a capital gain or loss depending on the difference between the selling price and the musician's basis in that asset.

For a musician, the basis is typically what they initially invested in creating the song, meaning that if they sell the rights for more than this basis, they realize a capital gain, which is subject to capital gains tax. Long-term capital gains (for assets held longer than one year) are usually taxed at a lower rate than ordinary income, making this treatment favorable.

The other options misunderstanding the nature of the transaction or applying incorrect tax principles. Royalty income refers to payments received for the ongoing use of an intellectual property asset, which does not apply in this scenario as the full rights have been sold. Claims of subsequent royalties or suggesting the income is nontaxable misinterpret the tax treatment associated with asset transfers in this context. Thus, the correct approach recognizes the sale of rights as a transaction eligible for capital gains consideration.