[ad_1] Passive income. It’s not an exaggeration to say it’s probably the best kind of income you can earn. Simply put, it’s income you earn with little or no effort on your part. And that means you’ll be free to earn even more money doing other things – or just enjoying your life. Jeff Rose is a big advocate of passive income, and he even wrote an article outlining 28 ways to make it a reality. But like all forms of income, passive income is generally subject to income tax. How is passive income taxed? Much of it will depend on the source, as well as the type of income it is. As we’re about to see, not all passive income taxed the same way. #ap50064-ww{padding-top:20px;position:relative;text-align:center;font-size:12px;font-family:Lato,Arial,sans-serif}#ap50064-ww #ap50064-ww-indicator{text-align:right;color:#4a4a4a}#ap50064-ww #ap50064-ww-indicator-wrapper{display:inline-flex;align-items:center;justify-content:flex-end;margin-bottom:8px}#ap50064-ww #ap50064-ww-indicator-wrapper:hover #ap50064-ww-text{display:block}#ap50064-ww #ap50064-ww-indicator-wrapper:hover #ap50064-ww-label{display:none}#ap50064-ww #ap50064-ww-text{margin:auto 3px auto auto}#ap50064-ww #ap50064-ww-label{margin-left:4px;margin-right:3px}#ap50064-ww #ap50064-ww-icon{margin:auto;display:inline-block;width:16px;height:16px;min-width:16px;min-height:16px;cursor:pointer}#ap50064-ww #ap50064-ww-icon img{vertical-align:middle;width:16px;height:16px;min-width:16px;min-height:16px}#ap50064-ww #ap50064-ww-text-bottom{margin:5px}#ap50064-ww #ap50064-ww-text{display:none}#ap50064-ww #ap50064-ww-icon img{text-indent:-9999px;color:transparent} Ads by Money. 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Public.com lets you invest in stocks, ETFs, and crypto with any amount of money. Share insights in a community and access a wealth of educational content. HawaiiAlaskaFloridaSouth CarolinaGeorgiaAlabamaNorth CarolinaTennesseeRIRhode IslandCTConnecticutMAMassachusettsMaineNHNew HampshireVTVermontNew YorkNJNew JerseyDEDelawareMDMarylandWest VirginiaOhioMichiganArizonaNevadaUtahColoradoNew MexicoSouth DakotaIowaIndianaIllinoisMinnesotaWisconsinMissouriLouisianaVirginiaDCWashington DCIdahoCaliforniaNorth DakotaWashingtonOregonMontanaWyomingNebraskaKansasOklahomaPennsylvaniaKentuckyMississippiArkansasTexas Join Today Offer valid for U.S. residents 18+ and subject to account approval. There may be other fees associated with trading. See Public.com/disclosures. What Makes Passive Income Passive? The definition of passive income I’ve given in the introduction (and italicized) is very general. It may even be a bit misleading. We can take it a step further and say that it’s also often subjective. Let’s start with this: getting an income source to the point where becomes passive is often anything but passive! For example, let’s say you sell your business and receive monthly installment payments from the new owner for a large part of the purchase price. The installment payments are definitely a source of passive income. But if it took you 20 years to build the business, that part of the activity was anything but passive. Still another gray zone in the definition is in the amount of effort put into the activity. This is also where the definition can become subjective. For example, you might build a successful blog that earns you $10,000 per month. But you’ve moved it to a point where the blog earns that income with no more than about 50 hours of work per month on your part. The income is earned primarily because you’ve managed to automate the site to the point where it practically runs itself. This is an example of what would best be considered a semi-passive income source. And let’s not forget the years you spent building up the blog, when you may have been working 60 to 70 hours per week to make it happen. Semi-passive income sources are often lumped in with true passive income sources, which is where the passive income gray zone lies. As we’ll see in a moment, the IRS has very specific guidelines on passive income. That’s why it’s important to understand the often subtle difference between a truly passive income source, and a semi-passive one. Examples of Passive Income Sources Let’s start with a list of truly passive income sources, the kind that requires no effort on your part whatsoever. (But we’ll ignore the reality that real effort went into creating or building these sources.) True passive income sources include: Interest-earning investments, like bonds and certificates of deposit. Stock investments, either earning dividends or producing capital gains. Direct real estate investing for rental income and long-term capital gains, or both. Most types of real estate crowdfunding, like Fundrise, or income generated from real estate investment trusts (REITs). Participating in pass-through business entities, in which you earn income, but have limited liability and are not involved in management. These typically include partnerships, S corporations, and limited liability companies. Semi-passive income sources (those requiring little effort on your part): Buying or building a business that requires only minimal work from you to earn an income. Renting out part of your home. Selling products through affiliate marketing. Creating a digital product, like an e-book or instructional course, that’s sold through affiliate marketing arrangements. Buying and selling websites, domain names, and other digital property. Each of these ventures will require some effort on your part, even if it’s only a few hours a month. But that participation, small that it may seem, is critical to the success of the venture. #ap82255-ww{padding-top:20px;position:relative;text-align:center;font-size:12px;font-family:Lato,Arial,sans-serif}#ap82255-ww #ap82255-ww-indicator{text-align:right;color:#4a4a4a}#ap82255-ww #ap82255-ww-indicator-wrapper{display:inline-flex;align-items:center;justify-content:flex-end;margin-bottom:8px}#ap82255-ww #ap82255-ww-indicator-wrapper:hover #ap82255-ww-text{display:block}#ap82255-ww #ap82255-ww-indicator-wrapper:hover #ap82255-ww-label{display:none}#ap82255-ww #ap82255-ww-text{margin:auto 3px auto auto}#ap82255-ww #ap82255-ww-label{margin-left:4px;margin-right:3px}#ap82255-ww #ap82255-ww-icon{margin:auto;display:inline-block;width:16px;height:16px;min-width:16px;min-height:16px;cursor:pointer}#ap82255-ww #ap82255-ww-icon img{vertical-align:middle;width:16px;height:16px;min-width:16px;min-height:16px}#ap82255-ww #ap82255-ww-text-bottom{margin:5px}#ap82255-ww #ap82255-ww-text{display:none}#ap82255-ww #ap82255-ww-icon img{text-indent:-9999px;color:transparent} Ads by Money. 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Download Now Offer valid for U.S. residents 18+ and subject to account approval. There may be other fees associated with trading. See Public.com/disclosures. Passive Income for Income Tax Purposes For income tax purposes, the IRS has very specific guidelines as to what constitutes a passive income activity. It centers around the question of material participation. The amount of activity you put into an income generating venture represents material participation. It’s the deciding factor in passive versus non-passive income sources, at least according to the IRS. The IRS defines material participation as follows: You materially participated in a trade or