Compare and contrast active, portfolio, and passive income. Provide an example of each. What types of losses are potentially characterized as passive losses? What are the implications of treating losses as passive?
Internal Revenue Code Sec 61 lists types of gross income which include active, portfolio and passive income sources. There are 15 different types of income sources defined and the terms active, portfolio and passive might apply to any of them, depending on circumstances.
This is a category of income represented by trade or business activity. By definition, active income means that the taxpayer is actively involved in the production of income. With business activity, profits and losses are allowable with no limitation (expect in special circumstances). W-2 earnings are also active income. Active income can result from the use of labor or the use of capital, but the key is the level of involvement.
For example, if an individual owns an interest in a partnership and is actively ...
The 530 word solution presents detailed information comparing active, portfolio and passive income with examples.