First, a little background information: Several years ago I made an investment in a tax preparation business. For a one time payment, I received a small percentage of all the future income from franchise fees and royalties (tax prep fees). The deal only applied to a fixed geographic area, not the entire country. The percentage was limited to the amounts received by an entity set up to develop the geographic territory. I have received a 1099-Misc every year, with the total amounts paid to me shown in box 3. I've been paying taxes on these amounts as "other income", not "Royalties" (box 2).Secondly, the questions: Is "other income" correct? Could the payments received have been considered a return of capital? As long as I was getting paid, I never questioned the situation. Now, there is a possibility the entity with which I contracted may either fail or be sold for only a nominal sum. Both of those outcomes would result in the loss of a portion of my initial investment, even considering all payments received to date. If that happens, how much of the loss can I take on my taxes? Is this considered to be a loss of all my initial investment?I've tried to be brief, if there is a key bit of information missing, please let me know.Simple
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