Passive income is a type of unearned income that is earned automatically with minimal manpower to earn or maintain. It is often combined with other sources of income, such as side hustle and bustle. [1] In the United States, the IRS divides income into three categories: active income, passive income and portfolio income. Passive income, as earned income, is the result of capital growth or is related to the tax deduction mechanism, and is taxable.

It is called progressive passive income when the earner spends little effort to grow income. Examples of passive income include rental income and any business activities that are not materially engaged by the income recipient. Some jurisdictional tax authorities, such as the Internal Revenue Service in the United States, distinguish passive income from other forms of income, such as income from permanent or contract employment, and may tax it differently.

While it may seem like “harvesting without sowing”, it often requires a long period of work and accumulation before passive income can be earned. Passive income is a necessary prerequisite for financial independence and early retirement as a person can be free from doing continuous work to survive whether he or she does any meaningful work or not. On the other hand, if a person lives from salary to salary when he stops working, the money he earns through active income will also stop flowing to him.

Passive income is not always a lump sum payment, such as an inheritance or proceeds from the sale of an asset such as a house or shares. [2] In contrast, passive income is a source of income that has a sense of continuity over time. Passive income does not mean fixed income either. [3] Some passive income may last for several years, others may last for decades, or even centuries across generations, such as property, dividends, debt or bitcoin income. But over time, all these forms of income will dry up and disappear for a variety of reasons.

Passive income is usually not passive for everyone. [4] Perhaps someone who reaps passive income is based on the regular work of others. The level of passivity of an income depends on the perspective of the person concerned. What one sees as passive income may be active income to others.

In general, high -income groups have more diverse sources of income that lead to a higher probability of having access to hidden income, and therefore passive income can also be a good reason to avoid taxes by transferring active income to passive income. [5] The loop hole has generated large amounts of “passive income” such as income from property transfers and property leases, and even “earned income” such as income from irregular labor remuneration, most of which has not been fully taxed.