What are royalties in tax terms?

Royalties, in tax terms, refer to payments received for the right to extract natural resources or use creative works. This includes compensation for the use of intellectual property such as patents, copyrights, and trademarks, as well as payments made to artists, musicians, and authors when their works are used commercially. These payments are typically based on a percentage of sales or revenue generated from the use of the asset or work, making them a form of income that is subject to taxation.

This definition aligns directly with how royalties are treated in tax law, emphasizing that they are not just income for services rendered or interest from investments, but specific payments tied to the use and monetization of intellectual or physical property. Payments for property rentals would generally be classified as rental income rather than royalties, and interest income from investments pertains to earnings from savings, bonds, or other financial instruments, which is also distinct from royalty payments.