Passive income is an income received on a regular basis, with little effort required to maintain it.
The American Internal Revenue Service categorizes income into three broad types, active (earned) income, passive income, and portfolio income. It defines passive income as only coming from two sources: rental activity or "trade or business activities in which you do not materially participate." Other financial and government institutions also recognize it as an income obtained as a result of capital growth or in relation to negative gearing. Passive income is usually taxable.
Some examples of passive income are:
- Earnings from a business that does not require direct involvement from the owner or merchant;
- Rent from property;
- Royalties from publishing a book or from licensing a patent or other form of intellectual property, such as computer software product;
- Earnings from internet advertisements on websites;
- Dividend and interest income from owning securities, such as stocks and bonds, is usually referred to as portfolio income, which may or may not be considered a form of passive income. In the United States, portfolio income is considered a different type of income than passive income;
The IRS has a specific definition of passive income that excludes some of the incomes listed above. Royalties, for example, are, according to the Service guide, generally non-passive in nature. Additionally, interest, dividends, annuities, and gains from stocks and bonds, lottery winnings, salaries, wages, commissions, retirement income, guaranteed payments for services are considered by the IRS to be non-passive.
- "Topic 425 - Passive Activities– Losses and Credits". Retrieved 2009-06-18.
- Ernest R.Larkins; "International applications of U.S. income tax law" John Wiley & Sons 2004 P.288
- Clarence F. McCarthy, Billy M. Mann, William H. Gregory; "The Federal income tax: its sources and applications" Prentice-Hall, 1971 page 74