In the last few years, many articles have popped up saying inflation is rising much quicker than our revenues. As a result, this has forced many to consider a second job or cut certain expenses. What most articles don’t mention is that there are other ways of generating income, such as passive income. What are passive income ideas?
Passive income occurs during an activity where a person is not a full participant. One of the most popular examples is with a rental property. Unfortunately, not everyone has the capital required to buy properties and lease them.
Thankfully, there are other, more advantageous ways to receive passive income. Below, we will define what passive income is, give a few examples, and explain how it is taxed.
What Is Passive Income?
Passive income is basically a side hustle. How is it beneficial to individuals? It provides an income stream for a certain period of time and revenue to fall back on. Very few will solely rely on this income for life, but it will be helpful during financially difficult times, such as the last two years for many individuals. Income is separated into three main categories.
Passive Income: Earnings derived from an activity where the person is not actively involved, such as rental income. We will discuss other sources of passive income below.
Active Income: Examples include wages from work, tips, commissions, self-employed work, or active participation in a business (500+ yearly hours of commitment or 100+ hours and no other employee works more).
Portfolio Income: This final category includes the income derived from any investment, such as interest, capital gains, dividends, or royalties. Many investors believe that dividends and royalties fall into the passive income category since investors are not actively involved in the benefits.
Passive Income Ideas
Now that we defined what is and isn’t passive income, let’s go over a few of the most common examples. In the last section, we will venture outside the box and offer a few alternatives to the common definition.
Rental Property
The simplest way many individuals and corporations earn passive income is through their rental properties. As a result, this can be done by simply renting the property or using popular platforms such as Airbnb, Booking (NASDAQ: BKNG), and others. As long as the owner of the property is not a real estate professional, the income earned isn’t part of the active income category.
Let’s look at an example. Let’s say there’s a company that produces alcohol. It recently purchased a duplex that it rents out. Since its main business isn’t real estate, the money generated from the rental property falls into the passive income category.
As a result, the same logic applies to individuals renting their summer home or secondary property. Whatever surplus they accumulate after their mortgage payment and expenses becomes their revenue.
Business Investment
Another popular way to receive passive income is by investing in a business. Let’s say you invest $100,000 into your friend’s beer company without any managing or active participation; the revenue received in return is categorized as passive income. More precisely, less than 500 yearly hours must be invested in the business, and no substantial involvement in the business.
Leasing
Another common practice for passive income is equipment leasing. Some individuals own multiple cars, trucks, and other equipment that may be rented out to other parties. The income generated from these leases can be considered passive income, as there is no active participation to make it a business.
Other Passive Income Sources
There are countless ways of generating passive income. Many sell second-hand clothes or other everyday objects, start a YouTube (or OnlyFans) channel, teach language classes, rent their parking space, or even advertise on their cars. There is more than one way to generate a little extra income without too much effort.
Now that we have a few ideas for passive income, how does the IRS tax these activities?
How Is Passive Income Taxed?
Similar to active income, passive income taxation depends on whether it is filed as a single taxpayer or jointly/married. The other major distinction is the gain’s duration (short-term or long-term). Short-term gains relate to assets held for less than one year. They are taxed as capital gains for both single and joint filings. Here is the breakdown.
| Income | Tax Rate |
|---|---|
| ≤$9,950 | 10% |
| $9,951 – $40,525 | 12% |
| $40,526 – $86,376 | 22% |
| $86,377 – $164,925 | 24% |
| $164,926 – $445,850 | 32% |
| $445,851– $523,600 | 35% |
| $523,601+ | 37% |
Even if short-term passive income is heavily taxed, it is better than having no income. On the other hand, when the asset providing the income is considered long-term, it becomes a game-changer. In fact, here is the much more advantageous breakdown for taxes of long-term passive income sources.
| Single Income | Tax Rate | Joint Income |
|---|---|---|
| ≤$9,950 | 0% | ≤$19,900 |
| $9,951 – $40,400 | 0% | $19,901 – $80,800 |
| $40,401 – $445,850 | 15% | $80,801 – $501,600 |
| $445,851+ | 20% | $501,601+ |
To conclude this section, it is much more tax-efficient for investors who keep their assets for longer than a year. The difference is significant since no taxes are paid for passive income until $40,400. As income becomes more important, tax savings can amount to even greater savings.
The IRS can’t keep track of all your passive income. If you sell your vintage Levi’s denim jacket for $100, odds are they’ll never know about it. In the next section, the IRS and major government bodies actively monitor investors for some tax dollars.
Passive Income Ideas With Crypto
In this final section, we will look at an alternative way to earn passive income. It may not be the most popular method or the safest, but it offers crypto enthusiasts an additional and lesser-known way to earn some income.
Ethereum Validators
Since Ethereum’s transition to proof-of-stake, investors can stake their holdings to earn passive income. It’s the equivalent of stock dividends or a savings account, but for crypto. There are many ways to achieve passive income thanks to Ethereum.
The most conventional way is to stake 32 ETH (today’s equivalent of $60,000 USD) to validate and process transactions. Thanks to validators, the Ethereum network grows. However, becoming a validator requires capital and technical know-how.
Not everyone possesses sufficient funds, time, and skill to participate actively in the network. At the moment, validators can earn between 2 to 20% return. Ethereum provides more information on its website.
Coinbase and Lido
First, Coinbase (NASDAQ: COIN) allows its users to convert their Ethereum into Ethereum 2 and earn 3.83% annual interest on their holdings. This rate fluctuates depending on how much Ethereum is staked. Coinbase earns 4% and charges a fee.
Next, Lido Finance, which is the largest Ethereum staking pool, allows its users to convert their holdings into Lido Staked Ethereum and earn 4.6%. The price slightly differs between the two coins, but the gap has narrowed recently.
Lido users can sell their holdings at any time. In both cases, Ethereum investors can benefit from a competitive dividend from their favorite crypto.
Other Cryptos
Various other cryptocurrencies offer the same financial rewards to their users. However, it is important to be careful before staking your funds. Thorough research should be performed. In some cases, there is high risk/high reward. It can be worth it for the short term, but over the long term, only proven cryptos should be considered.
When Bitcoin became popular, many crypto Ponzi schemes emerged. To this day, there are scammers out there who will lure investors with a very appealing rate of return. One day, the platform will shut down, and everyone’s money will disappear. If it’s too good to be true, stay away from it.
Final Thoughts: Passive Income Ideas
Now you have some passive income ideas to think about. Your 9-to-5 job doesn’t have to be your only source of revenue. An increasing number of people are finding ways to generate passive income. It doesn’t take too much time, and the financial rewards are considerable. Plus, you can turn your favorite hobby into a bit of cash.
Frequently Asked Questions
To make money passively, you can invest in dividend stocks or ETFs. You can also rent out anything you aren't using like a car, house, or apartment.
Doing things like renting real esate or investing in dividend stocks can bring in quite a bit of profit passivly.
The IRS taxes passive income at its regular rates (see table above). But if you're a high earner, they add an extra percentage to that.
