Is portfolio income considered non passive income?
This question was answered by Taylor, CPAI, Deduction’s AI tax accountant, and Deduction’s licensed CPAs.
Yes, portfolio income is non-passive income, but it's treated as its own distinct category separate from both passive and active (earned) income.
Three Income Categories
The tax code divides income into three buckets:
Why It Matters
Portfolio income cannot be used to offset passive losses. If you have $20,000 in passive losses from a rental property and $30,000 in dividend income, you cannot net those against each other. The passive losses remain suspended until you have passive income or dispose of the activity.
What Qualifies as Portfolio Income
Interest from bank accounts, bonds, and lending arrangements; dividends from stocks and mutual funds; capital gains from selling investment assets; royalties not derived from ordinary business activity; annuity income (non-qualified).
Exceptions
Self-charged interest: Interest income from loans to your own passthrough entity may be recharacterized as passive to offset passive losses (Treas. Reg. § 1.469-7).
Net Investment Income Tax (NIIT): Portfolio income is subject to the 3.8% NIIT if your MAGI exceeds $200,000 (single) or $250,000 (MFJ).
Sources:
- IRC § 469 - Passive Activity Losses and Credits Limited
- IRC § 469(e)(1) - Portfolio income exclusion from passive income
- Treasury Regulation § 1.469-2T(c)(3) - Portfolio income defined
- IRC § 1411 - Net Investment Income Tax
The information provided does not, and is not intended to, constitute legal advice.
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