Passive income is income from sources that require little to no effort to earn and maintain. And depending on the income source, it can also continue to grow with little additional effort.
Being able to earn extra money while you sleep is an amazing thing.
But is investing in stocks passive income? It seems like it should be so why is this even a question?
One quick note I should mention. I’m not a financial planning professional. I’m sharing what’s working for me as part of my investing strategy. Always do your own research and consider your own circumstances before making any financial decisions. You could also check with your favorite financial professional to understand what would be best for your situation.
Do you receive passive income from investing in stocks?
When it comes to investing in the stock market, it feels like passive income because really you only need to research the company and buy the shares.
You’ll technically only earn money when you sell the shares assuming the stock price is higher when you sell it.
Or if you buy stock shares that pay dividends, you’ll receive income as those are distributed. No extra effort involved from you there. You can even set up a monthly dividend portfolio to receive extra money regularly.
But does the IRS consider investing in stocks passive income?
Here’s where it gets interesting at least from an IRS perspective. The IRS defines passive income as:
- Trade or business activities in which you don’t materially participate during the year.
- Rental activities, even if you do materially participate in them unless you’re a real estate professional.
The IRS also defines a category of income called portfolio income. From an IRS perspective that’s where it classifies dividends, capital gains, and interest.
So from a common definition, you consider dividends and investment income passive income because there’s little effort to create it and keep it growing.
From an IRS perspective, it’s technically considered portfolio income.
Does it really matter?
You’ll likely need to pay taxes either way. The difference potentially comes at the tax rate you need to pay on the income.
Make sure to double-check with your favorite tax professional to understand how this may apply to your situation.
Wrapping up. Is investing in stocks passive income?
Passive income from a casual definition angle is any money you earn from not having to do much extra work to receive it. The money you receive while you sleep feels like passive income.
From a technical IRS definition, it’s actually considered portfolio income. Ultimately it matters most from a tax rate perspective, not from a casual conversation perspective.
And for you, do you consider investing in stocks passive income? Or do you use the IRS definition of portfolio income?
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