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Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.
The U.S. Internal Revenue Service categorizes income into three broad types, active 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:
- Any type of cash flowing property income
- Profits, cash flow, and earnings from a business that does not require direct involvement from the owner or merchant;
- Rental income and incoming cash flow from property or any piece of real estate
- Interest income derived from a bank account or pension.
- Royalties paid for intellectual property such as music, books, manuscripts, computer software, or a patent;
- Earnings from internet advertisements on websites;
- Dividend and interest income in the form of cash flow or capital gains from owning securities and commodities, such as stocks, currencies, gold, silver, ETFs, 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 U.S. 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.
- Clarence F. McCarthy, Billy M. Mann, William H. Gregory; "The Federal income tax: its sources and applications" Prentice-Hall, 1971 page 74
- Ernest R.Larkins; "International applications of U.S. income tax law" John Wiley & Sons 2004 P.288
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