Yeah it's kind of tricky to classify this on the passive/working[2] income scale, and I'm not even sure it's a useful classification at that point. But here's how I'd think about it.
Imagine you work a legit, regular job. Obviously, that's not passive income. But say you get a deal[1] that, for every year where you defer receiving the salary from the employer, you get a 10% bonus (compounded like interest).
The correct way to look at that, IMHO, would be "The original salary is working income, the additional gains from deferral are passive income."
Then apply that to the case of these writing royalties. Which part is what? Well, he worked to write the book, but received income over several later years.
So then I'd break it into:
a) "the hypothetical amount he could have sold the IP to a publisher for when he finished it", which is rightly called working income.
b) any gain above that amount that he received via the royalty deal, which would be passive income.
(This is probably 100% unrelated to how the IRS would classify it.)
[1] which, for simplicity, we'll assume is trustworthy and above-board, even though an offer like this probably wouldn't be in practice.
[2] In common parlance, I think "working income" would be called "earned income" but I don't like that phrasing and so avoid it here.
Imagine you work a legit, regular job. Obviously, that's not passive income. But say you get a deal[1] that, for every year where you defer receiving the salary from the employer, you get a 10% bonus (compounded like interest).
The correct way to look at that, IMHO, would be "The original salary is working income, the additional gains from deferral are passive income."
Then apply that to the case of these writing royalties. Which part is what? Well, he worked to write the book, but received income over several later years.
So then I'd break it into:
a) "the hypothetical amount he could have sold the IP to a publisher for when he finished it", which is rightly called working income.
b) any gain above that amount that he received via the royalty deal, which would be passive income.
(This is probably 100% unrelated to how the IRS would classify it.)
[1] which, for simplicity, we'll assume is trustworthy and above-board, even though an offer like this probably wouldn't be in practice.
[2] In common parlance, I think "working income" would be called "earned income" but I don't like that phrasing and so avoid it here.