Investment Income

Investment income is the money you receive from assets you own—above the amount you originally invested. It includes interest, dividends, rents, royalties, and capital gains realized when you sell an asset for more than its cost. Understanding what counts as investment income, how it’s realized, and how it’s taxed helps with planning, reporting, and deciding whether you can rely on investments for living expenses.

Key takeaways
* Investment income is any financial gain above the original cost of an investment.
* Common forms: interest, dividends, rent, royalties, and capital gains.
* Only realized gains (sold or withdrawn) are counted as income for tax purposes.
* Tax treatment varies by holding period, type of income, and account (e.g., IRAs, 401(k), Roth).

What counts as investment income
Investment income generally includes:
* Interest — from bank accounts, CDs, and bonds.
* Dividends — regular payments from stocks or funds.
* Capital gains — profit from selling stocks, real estate, collectibles, or other assets for more than you paid.
* Rental income — net cash flow from investment real estate (after allowable expenses).
* Royalties and other passive payments.

Unrealized vs. realized gains
* Unrealized gains are increases in value that exist only on paper while you still own the asset.
* Realized gains become investment income when you sell the asset (or withdraw and lock in the gain).

Types of investments that generate income
* Cash and fixed-income: savings accounts, money market funds, CDs, corporate and government bonds.
* Equities and funds: stocks, ETFs, mutual funds (dividends and sale proceeds).
* Real estate: rental cash flow and property sales (capital gains).
* Alternatives: precious metals, collectibles, royalty interests, option strategies, REITs.

Example scenarios
* Short-term stock trade: Buy stock for $50, sell two weeks later for $70 → $20 profit is investment income, taxed as short-term gain (ordinary income rates).
* Long-term real estate: Buy property for $500,000, sell 10 years later for $1.5 million → $1 million gain is a long-term capital gain, typically taxed at preferential long-term rates (depending on total income and jurisdiction).

Taxation basics
Tax treatment depends on holding period, income type, and account:
* Short-term vs. long-term: Assets held less than a year typically generate short-term gains taxed at ordinary rates; assets held longer often qualify for long-term capital gains rates, which are usually lower.
* Qualified dividends: Certain dividends meet criteria to be taxed at long-term capital gains rates rather than ordinary rates.
* Retirement accounts:
* Traditional 401(k)/IRA — contributions may be tax-deferred; withdrawals are generally taxable as ordinary income.
* Roth IRA — qualified distributions are tax-free if account rules are met.
* Interaction with credits and thresholds: Investment income can affect eligibility for credits (e.g., Earned Income Tax Credit) and may be treated differently for specific tax provisions.
* Netting: Capital gains and losses are typically netted against each other when filing taxes, which can reduce taxable gains.

How to calculate investment income
1. Add interest, dividends, rents, royalties, and other receipts for the year.
2. For sales, calculate capital gain/loss = sale proceeds − cost basis − selling expenses.
3. Net short-term and long-term gains separately (tax rules differ by holding period).
4. Apply any allowable deductions, offsets, or netting rules required by your jurisdiction.

Can you live off investment income?
Potentially, yes—if your investments produce sufficient and reliable income to cover expenses. Factors to consider:
* Size and diversification of the portfolio
* Yield and stability of income sources (dividends, rents, interest)
* Inflation, taxes, and unexpected expenses
* Withdrawal strategy and sequence of returns
Consult a financial planner to assess sustainability and risks.

Bottom line
Investment income is the return you earn above your original investment, realized through interest, dividends, rents, royalties, and capital gains. Only realized gains count as income for most tax systems, and tax rates often depend on how long you held the investment and the type of account that held it. Knowing how investment income is calculated and taxed helps with planning, reporting, and deciding whether your investments can support your lifestyle. If in doubt, seek advice from a tax professional or financial advisor.