Self employed

TurboTax handled the income correctly based on the way you answered the questions.  If the royalty had been tied to your business, then it would be taxed as business income subject to self-employment tax.

In your case, since you have information in hand that it should be treated as a capital gain, you will enter the income in the Investment Income section of your return so that it is reported on Schedule D as if you sold stock with a zero cost basis.

You will need to go back to the Form 1099-MISC entry and delete the information that you entered.  Then, use the steps below to report the income:

• On the top row of the TurboTax online screen, click on Search (or for CD/downloaded TurboTax locate the search box in the upper right corner) 
• This opens a box where you can type in “schedule d” (be sure to enter exactly as shown here) and click the magnifying glass (or for CD/downloaded TurboTax, click Find)
• The search results will give you an option to “Jump to schedule d”
• Click on the blue “Jump to schedule d” link 

Go through this section of your return as if you are entering a sale of stock.  Indicate that you did not receive Form 1099-B for the transaction.  You will need to enter a description for the payment, the date sold (date of the payment), the date acquired (date of the patent), proceeds (amount of payment shown on Form 1099-MISC), and the cost basis ($0).  

Be sure to keep your Form 1099-MISC and the documentation issued by the IRS in your records in the event that there is ever a question about this item on your tax return.