According to the Internal Revenue Service, capital gains are not considered passive income.
Capital Gains Defined
The Internal Revenue Service strictly defines passive income to include only a few revenue streams, and the election to treat capital gains as passive income does not exist. A capital gain is an increase in value of a capital asset, such as an investment property or stocks, that makes them worth more than they were when you purchased them.
However, until the capital asset is sold, you will realize no gains. Capital gains can be short-term – held for a year or less – or long-term assets held for more than a year. When a capital asset is sold, then the proceeds from the sale are taxable. But, just how much you're taxed depends on several factors, including whether or not it was held as a long or short-term asset.
if you decide to report it as passive capital gain, you should include a disclosure in your return that you have treated the gain from the disposition of partnership X as a passive capital gain resulting in the allowance of passive losses from other partnerships. Or something to this effect. making a disclosure might save you fraud penalties.
