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Concept
Passive income
Summary
Passive income is a type of unearned income that is acquired with minimal labor to earn or maintain. It is often combined with another source of income, such as regular employment or a side job. Passive income, as an acquired income, is taxable.
Examples of passive income include rental income and business activities in which the earner does not materially participate. Some jurisdictions' taxing authorities, such as the Internal Revenue Service in the United States, distinguish passive income from other forms of income, such as income from regular or contractual employment, and may tax it differently.
It can take a long period of work and accumulation before passive income can be acquired. Passive income can be a way of creating financial independence and early retirement, because the beneficiary will receive an income regardless of whether they are materially active in the activity creating the revenue.
Passive income is not always a lump sum payment, like an inheritance or proceeds from the sale of an asset such as a home or stock. It can also come from a source that has a likely continuity over time but is not guaranteed. Some passive incomes may last for several years, or even centuries, across generations. Examples of these longer term sources of passive income can include: property; dividends; debt; and other appreciating asset classes.
Generally speaking, high-income groups have more diversified sources of revenue leading to a higher probability to have access to hidden income, and therefore passive income can also be a motivation for tax avoidance by transferring active income into the passive one. The loophole has resulted in a large amount of "passive income" such as income from property transfer and property leasing, and even "earned income" such as income from non-regularly occurring labor remuneration, which to a large extent has not been taxed to the fullest extent. As a result, there is voice from the public that personal tax has been degraded to a "wage tax" aimed at exploited middle income working class.
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