How to Invest in Royalties: Royalty Trusts, Royalty Stocks, Music and Mineral Rights
A royalty is a payment for the right to use something you own: the oil under a piece of land, a song, a book, a patent. You can earn royalties by creating something, or you can buy an existing royalty stream and collect the payments. This guide is about buying. The appeal is income that does not depend on you doing any work. The catch is that most royalty streams shrink over time, and the price you pay has to account for that.
The Short Answer
- Easiest: buy shares of a publicly traded royalty trust or royalty company through any brokerage account. You can sell any trading day.
- Most direct: buy a music or other royalty stream at an online auction, or buy mineral rights. These are private deals: hard to resell and hard to value.
- Royalties run down. Oil and gas wells deplete, and most songs earn less each year after release. A price that looks cheap against last year's income can still lose money.
- Taxed as ordinary income, usually on Schedule E. Oil and gas royalty owners can deduct depletion.
- Be wary of private oil and gas offers. The SEC has warned that fraud cases in this area rose sharply, and one firm with "Royalties" in its name raised $485 million from at least 7,700 investors.
What a Royalty Is
The IRS describes royalties from copyrights and patents as amounts "paid to you for the right to use your work over a specified period of time", usually based on units sold, such as books or tickets. Oil, gas and mineral royalties are a share of production or revenue paid by the company that leases the property from you. In both cases the owner of the royalty does not run anything. A mineral royalty owner does not pay to drill the well; a songwriter's royalty buyer does not pay to promote the song.
That is the key difference from owning the business itself. Many royalties are a share of revenue, paid before the operator's costs; some, called net royalties, are paid only after costs, which is how Permian Basin Royalty Trust can receive nothing in a month when costs run high. Either way you have no say: if the operator stops drilling or the song stops being played, the payments fall and there is nothing you can do about it.
Four Ways to Buy Royalty Income
| Way to invest | What you own | How you buy | Can you sell easily? | Main risk |
|---|---|---|---|---|
| Royalty trust | Units of a trust that holds fixed oil and gas royalties | Brokerage account (stock exchange) | Yes | Payments follow oil and gas prices and production; the properties run out |
| Royalty company | Shares of a company that keeps buying royalties (mining, drugs, energy) | Brokerage account | Yes | Normal stock risk, plus the price of the metal or drug sales behind it |
| Music royalty stream | A share of a song or catalog's royalty payments, for a term or for life | Online auction marketplace | Hard | Earnings decline; you are paying a multiple of past income |
| Mineral rights | Ownership of minerals under specific land, or a royalty on them | Private purchase | Hard | Production depends on an operator you do not control; title and lease details |
Royalty Trusts
A royalty trust is a passive entity that holds royalty interests in specific oil and gas properties and pays out what it receives. Units trade on a stock exchange like shares. Two long-standing examples are Sabine Royalty Trust (ticker SBR) and Permian Basin Royalty Trust (PBT). Their annual reports show how these work in practice:
- They cannot buy new properties. Sabine's trust agreement prohibits the trustee from using trust assets to acquire any oil and gas lease, royalty or other mineral interest other than the ones it already holds.
- The assets run out. Sabine's 10-K states that "the assets of the Trust are depleting assets" and that eventually they "will cease to produce in commercial quantities". The trust ends after two successive years with gross royalty revenue under $2,000,000, among other triggers.
- Payments swing. Sabine paid $6.38 per unit in 2023, $5.45 in 2024 and $5.16 in 2025.
- You depend on the operator. Permian Basin Royalty Trust's distributable income was $0.55 per unit in 2024 and $0.31 in 2025, and the 2025 figure includes a $4.5 million partial settlement from a lawsuit the trustee brought against the operator of its Waddell Ranch properties over how royalties were calculated. Unit holders, the 10-K notes, probably could not sue the operator themselves.
- Taxed as if you own the royalty directly. Both trusts are grantor trusts: the trust pays no federal income tax, and its income and deductions flow to unit holders, who can claim depletion.
A high yield on a royalty trust is partly your own money coming back as the reserves are used up. Compare it with a dividend stock or a REIT, which can grow, rather than with a bond.
Royalty Companies
Royalty companies are ordinary corporations whose business is buying royalties, so unlike a trust they can keep adding new ones. Examples, as described in their own annual reports:
- Precious metals: Royal Gold (RGLD) buys "streams" and royalties on mines. A stream is a purchase agreement that, in exchange for an upfront payment, gives the right to buy some of a mine's metal at a fixed price. At the end of 2025 it held stream interests on 18 producing and 5 development-stage properties, and streams were 67% of its revenue. Like any metals business, its results follow gold and other metal prices.
- Drugs: Royalty Pharma (RPRX) calls itself the largest buyer of biopharmaceutical royalties: it pays drug developers and universities for a share of future sales.
These are stocks, with stock-market risk. Their dividends are ordinary corporate dividends, taxed like other dividends, not as royalty income.
Buying Music Royalties
Marketplaces such as Royalty Exchange auction shares of song and catalog royalties to individual buyers. According to its FAQ:
- You do not need to be an accredited investor. Buyers have to be verified by the site, and then can bid on any listing.
- Typical buyers are "high net worth individuals, family offices, and private equity funds".
- Each listing shows the royalty history for the share being sold, with the raw data in a spreadsheet, and states the term (a fixed number of years or the life of the rights).
- Royalties are generally paid quarterly or twice a year, and the site acts as administrator for most purchases.
- Sellers pay no listing fee; the site charges sellers a commission agreed before the auction.
The practical question is the price. Listings are usually judged against the last twelve months of earnings. What matters is whether earnings are rising, flat or falling year by year, not the best year in the history. Read every statement in the data file, check who collects and pays the royalties, and assume you will hold until the term ends: there is no stock exchange to sell on.
Mineral Rights
Owning mineral rights, or a royalty interest carved out of them, means getting a share of what an operator produces under a specific piece of land. Private mineral and royalty interests change hands in private sales, so there is no public price to check.
- The royalty rate is set in the lease. As a reference point, the federal rate for onshore oil and gas leases is 12.5% of production. The 2022 Inflation Reduction Act raised it to 16⅔% for new leases, and the 2025 tax and spending law (Public Law 119-21) repealed that increase.
- A royalty owner does not pay drilling costs; a working interest owner does, and carries far more risk. Make sure you know which one is being offered.
- Check the title and the lease with a landman or an oil and gas attorney in that state, and ask whether the lease is producing, who operates it, and what other royalties already come out of production.
If you sell your entire interest in oil, gas or mineral rights, the IRS treats the payment as a sale of section 1231 property, not as royalty income, so it may qualify for capital gain treatment.
A Worked Example: Why Decline Rates Matter
Hypothetical: you pay $7,000 at auction for a 10-year royalty stream that paid $1,000 over the last twelve months, a price of 7 times last year's income.
| If the royalties... | Total paid over 10 years | Annual return on $7,000 (before tax) |
|---|---|---|
| stay at $1,000 a year | $10,000 | About 7.1% |
| fall 10% a year | About $6,513 | About -1.5% (you lose money) |
The same price is a reasonable deal or a loss depending only on how fast the income declines. That is why the payment history, not the headline multiple, decides whether a royalty purchase works. Taxes reduce the income further: at a 22% federal rate, $1,000 of royalties leaves $780. Figures are illustrative, not a forecast for any real listing.
How Royalty Income Is Taxed
- Ordinary income. Royalties from copyrights, patents and oil, gas and mineral properties are taxed as ordinary income, at your regular rate.
- Schedule E for investors. Report them on Schedule E, line 4. If you are in business as a self-employed writer, inventor or artist, or hold an operating (working) oil and gas interest, use Schedule C instead.
- Form 1099-MISC. Payers must send a 1099-MISC (box 2) when they pay you $10 or more in royalties in a year. Oil and gas royalties are reported before severance taxes withheld.
- Depletion. Owners of an economic interest in mineral deposits or oil and gas wells recover their investment through the depletion allowance (Schedule E, line 18). Royalty owners and independent producers can use percentage depletion of 15% on up to 1,000 barrels a day of domestic oil (or the gas equivalent), limited to 65% of taxable income (IRC 613A).
- Royalty trusts and companies. Trust units pass the royalty income and depletion through to you. Royalty company dividends are taxed as dividends.
- Purchased music or patent royalties raise basis-recovery questions that depend on the deal; ask a tax professional before you buy, not after.
Red Flags Regulators Warn About
The SEC's investor alert on private oil and gas offerings says fraud cases in this area went from a few a year in 2005 and 2006 to an average of more than 20 SEC cases a year after that. Its examples include SEC v. Provident Royalties, in which Provident raised $485 million from at least 7,700 investors while misrepresenting how the money would be used, and paid earlier investors with later investors' funds. Warning signs:
- Promises that a well is about to strike, or that returns are high and nearly guaranteed.
- Pressure to decide fast on a "once-in-a-lifetime" opportunity.
- A seller who is not registered. Check brokers on FINRA BrokerCheck and advisers on the SEC's adviser search, and ask your state securities regulator about the person and the offering.
- A broker or adviser with a stake in the promoter. Ask for the due diligence report a registered broker must have, and for the history of the promoter's earlier offerings.
If You Want to Earn Royalties Instead
Creating something that pays royalties is a different path: self-published books, music, stock photos, designs or patents. Most creative work earns little, and platforms set the terms. For realistic numbers on book royalties and other creator income, see how to make money with AI (Amazon KDP's 35% and 70% royalty options) and selling AI art. Register copyrights with the U.S. Copyright Office and patents or trademarks with the USPTO before you license anything.
FAQ
How do I invest in royalties with a small amount of money?
Buy shares of a publicly traded royalty trust or royalty company through a brokerage account. You can buy a single share, sell any trading day, and the company or trust handles the royalty collection. Private royalty auctions and mineral rights usually take more money and cannot be resold easily.
Is royalty income passive income?
For an investor who owns a royalty and does no work, yes in everyday terms: it is reported on Schedule E, not as self-employment income. It is still taxed as ordinary income. A self-employed author or inventor earning royalties from their own work reports them on Schedule C instead.
How are oil and gas royalties taxed?
As ordinary income on Schedule E, line 4, reported to you on Form 1099-MISC box 2 if you receive $10 or more. You can deduct depletion; most individual royalty owners can use percentage depletion of 15% within the limits in IRC 613A.
Do royalty trusts pay forever?
No. They hold a fixed set of properties that deplete, cannot buy new ones, and end under conditions set in the trust agreement. Sabine Royalty Trust, for example, terminates after two straight years of gross royalty revenue below $2 million.
Is Royalty Exchange legit?
It is an established auction marketplace for music and other royalty streams that you can join without being an accredited investor after it verifies you. Whether a given listing is a good buy depends on the price compared with the royalty history and how fast earnings decline; there is no public market to resell what you buy.
What is the federal royalty rate on oil and gas?
12.5% of production for onshore federal leases. The 2025 law Public Law 119-21 repealed the 16⅔% rate that the Inflation Reduction Act had set for new leases from 2022. Private leases set their own rate.
Sources
- IRS Publication 525, Taxable and Nontaxable Income (royalties, depletion, sale of property interest)
- IRS, Instructions for Schedule E (line 4 royalties, Schedule C exception)
- IRS, Instructions for Forms 1099-MISC and 1099-NEC (box 2, $10 threshold)
- 26 U.S.C. 613A, percentage depletion for independent producers and royalty owners
- 30 U.S.C. 226, federal onshore oil and gas lease royalty rate and amendment notes
- Sabine Royalty Trust, Form 10-K for 2025
- Permian Basin Royalty Trust, Form 10-K for 2025
- Royal Gold, Form 10-K for 2025
- Royalty Pharma, Form 10-K for 2025
- Royalty Exchange, FAQ
- SEC Office of Investor Education and Advocacy, Investor Alert: Private Oil and Gas Offerings
This article is for general information and is not investment or tax advice. Tax rules, trust figures and platform terms were checked against the sources above on 2026-10-23. The worked example is hypothetical. Royalty investments can lose money; get advice on your situation before buying a private royalty interest.
