Passive income is a type of unearned income that is acquired with little to no labor to earn or maintain. It is often combined with another source of income, such as regular employment or a side job. Passive income, as an acquired or earned income, is typically taxable.

The most popular form of passive income is investing in a stock market index fund. Other examples of passive income include rental income and business activities in which the earner does not materially participate. Passive income can come in the form of a lump sum payment, like an inheritance or proceeds from the sale of an asset such as a home or stock. It can also be paid out over time, though not necessarily at a regular amount. Some passive incomes may last for several years, or even centuries, across generations. These typically involve appreciating asset classes, such as property, dividends, or debt.

It can take a long period of work and accumulation before passive income can be acquired. Passive income can be a way of creating financial independence and early retirement, because the beneficiary will receive an income regardless of whether they are materially active in the activity creating the revenue.

Passive incomes can be used as a tax avoidance scheme. Some jurisdictions' taxing authorities, such as the Internal Revenue Service in the United States, distinguish passive income from other forms of income, such as income from regular or contractual employment, and may tax it differently. Generally speaking, high-income groups have more diversified sources of revenue and are more able to hide particular sources, and hiding active income as passive income can lead to a lower tax bill. This loophole has resulted in a large amount of passive income such as income from property transfer and property leasing, and even "earned income" such as income from non-regularly occurring labor remuneration, which is sometimes taxed at a lower rate. As a result, critics say that the personal income tax has been degraded to a "wage tax" aimed at exploited middle income working class.^{[citation needed]}

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.