After seeing so many different versions of what a passive income is, to tell you the truth, I got fed up with the “creative” licenses that different people are taking to promote the concept of passive income.

I want a simple explanation of what the difference between my earned income, the income I make blogging, the income I receive from my investments, and the income I plan to receive from my REI opportunities in the future.

I found a nice, simple explanation as to why there are different types of income.

For purposes of the passive loss rules, income must be divided into three categories: active income, passive income, and portfolio income. (Source)

Active Income

Active income is income for which the taxpayer performs services. Examples are wages, salaries, tips, bonuses, and business and partnership income in which the taxpayer materially participates in the business or partnership. (Source)

Passive Income

Passive income is income from business activities in which the taxpayer does not materially participate, and all rental activities (except those of qualified real estate professionals). (Source)

Portfolio Income

Income from such sources as dividends, interest, capital gains, and royalties. (Source)

For me, the light bulb in my head went on when I saw the words “passive loss rules”. Now that I know what to look for, I went over to the IRS website so I could find out more about the different types of income and how “passive loss” plays a role.

The IRS has a terrific one-stop location where you can read all of the topics covered under Types of Income. While I study up on the types of income to get a better idea of what types of income I am making, I wanted to put up a simple picture to illustrate the three types of income.