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A passive activity is a trade or business in which the taxpayer does not “materially participate.” § 469(c)(1). An individual taxpayer may not deduct aggregate passive activity losses in excess of his/her passive activity income, nor claim credits in excess of the tax attributable to the aggregate of his/her net income from passive activities. §§ 469(a)(1), 469(d). We defer discussion of the details of § 469 to a course in partnership tax. The important point here is that there is absolutely no mis-matching of losses derived from passive activities with any other type of income – whether ordinary income or portfolio (investment) income – until taxpayer has sold all of his/her interests in passive activities.
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