Passive income

Passive income is often derived from work that one does not personally do. Stock-based dividends, for example, are typically based on regular business operations by real employees who are paid a salary for real work. But these dividends still serve as a passive income for stockholders, as the stockholder has done no physical work for this income. Rental income, on the other hand, does require physical labor in the form of managerial and custodial duties, but these can also be outsourced for minimum wage. This can allow the owner to receive a passive profit from their property, if renters are willing to pay more than the cost of upkeep and tax. Active income, on the other hand, is earned income including all taxable income and wages the earner receives for working. Active income includes wages, self-employment income, and material participation in an S corporation or partnership. In other words, active income refers to income earned by performing a service or some kind of work. Income from business is considered active in case that the owner satisfies the requirements for material participation (which is based on many factors, mainly on hours worked). Portfolio income is derived from investments such as dividends, interest, capital gains, and some royalties. Leveraged income is labor invested in a product that can be sold indefinitely in the future, e.g., writing a e-book or producing a video. This is sometimes called passive income, although the process of creating the product requires substantial work. == Sources ==

The United States Internal Revenue Service categorizes income as active income, passive income, or portfolio income. It defines passive income as only coming from two sources, or "passive activities": 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. About 20% of Americans receive passive income each year, mostly from interest on savings and bonds, dividends on stocks, and non-professional rental agreements (such as a homeowner renting a room to a roommate). Portfolio income (interest, dividends, royalties, gains on stocks and bonds) is considered passive income by some analysts. However, the IRS does not generally consider portfolio income as passive. Thus, it would be wise to turn to a tax professional on that subject. Also, self-charged interest can be included in passive income "if the loan proceeds are used in a passive activity". Self-charged interest income usually refers to loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest at any time during their tax year (this applies for both loans you made to the partnership or S corporation and loans that were made to you). Trade or business activities A trade or business activity is an activity that involves running a trade or business, is conducted in expectation of starting a trade or business or involves research or experimental expenditures. A silent partner is an individual who does not have any role in company and whose participation in a partnership is limited to providing capital to the business (that is why they are sometimes called limited partners). A silent partner earns a passive income since he gets an agreed percentage of the gross profits on a regular basis. == Europe ==

It would be complicated to state one conclusion about the passive income and the taxation of this type of income in Europe. In fact, there is no word defined as "passive income" by the European Commission. In addition, the European Union itself has no taxation powers. Every country levies different taxes on activities that are defined above as "passive". The Organisation for Economic Co-operation and Development (OECD) The Common Reporting Standard (CRS) does not define passive income as well. Each jurisdiction can define the items included in the list of passive income in its own way in accordance with domestic rules. However, the CRS provides a list of items that should generally be considered as passive income and should guide the countries. Income should be characterized as passive if it contains the portion of gross income that consists of: == China ==

China currently adopts a proportional tax rate of 20% for passive income and unearned income, which does not play the role of regulating the income distribution gap between active income and passive income as some expects argued. Specifically, the relative tax rates on these two incomes, with the former one being subject to a progressive marginal tax rate of up to 45% on larger amounts of income, while the later income, particularly capital gains, is only subject to a proportional tax rate of 20%, which is unfair on a horizontal basis and does not have the effect of regulating excessive income. == Taxation ==

United States' classification based on income source According to the US tax code, it does not specifically define income, but lists the various income items. The basic concept of the US federal personal income tax is the gross income, which is defined by the IRS as all income from any source, except for those excluded by law. There are four types of income depending on the income source: • income derived from labor, also known as active income, which is income derived from labor provided by an individual in return for remuneration, or income derived from the conduct of a business. Common types of income from active working include: wages, salaries, tips, bonuses and commissions; income from an active activity in a trade or business; income from the provision of labor; and income from illegal activities. • income from capital, also known as passive income, includes investments and the sale, trade or other disposal of invested assets. If a stock that you purchased increased in its price and you did not sell it, you do not have to pay taxes as there is no actual income. If a stock that you purchased lost its value and your total investment for the year resulted in loss, you do not have to pay taxes for that year. Non-residents who receive dividends from Russian companies have to pay a tax of 15%. Kazakhstan Income earned in the form of dividends is subject to income tax at the rate of 5%. Calculations, withholding and payment of tax are made by tax agents. In accordance with the Tax Code (Article 341, paragraph 1.7 and paragraph 1.16), the following cases are excluded from the taxable ‘passive’ income: • Dividends on securities that were included in the official list of stock exchanges operating on the territory of the Republic of Kazakhstan at the moment of the accrual of such dividends. • Income earned on increase in value of securities that were included in the official list of stock exchanges operating on the territory of the Republic of Kazakhstan on the day of sale. The benefits apply only to assets issued by Kazakhstani companies. Foreign companies will be subjects of a different taxation scheme. == See also ==