Code Section 465 of the Internal Revenue Code defines ‘At-Risk’ as the financial value the taxpayer has in jeopardy related to the business activity the taxpayer is invested in as some form of an owner. Effectively, the taxpayer may only take losses on his tax return contingent on the loss being directly tied to invested dollars with some form of tax basis.
In general, passive activity is a business operation that generates income for the owner with little to no active participation. The Internal Revenue Service has a more restrictive definition and it requires that the initial investment was done from a limited investor position. Those activities that require some sort of significant work up front such as writing, patent creation etc. are considered active income generators under the IRS rules.