Question

What is the main difference in the way that "earned income" and "capital gains (or portfolio income)" are acquired?

Answer 1

The main difference between "earned income" and "capital gains (or portfolio income)" lies in the source and nature of how these incomes are acquired:

1. **Earned Income**:
- **Source**: Earned income is derived from active participation in work or services provided. This includes wages, salaries, tips, commissions, and business profits from activities where you are actively engaged.
- **Nature**: It represents compensation for labor or services rendered. Earned income is typically regular and directly tied to efforts put in by an individual, such as working a job or conducting a business.

2. **Capital Gains (or Portfolio Income)**:
- **Source**: Capital gains arise from investments, specifically the increase in value of assets such as stocks, bonds, real estate, or other investments. Portfolio income also includes dividends and interest earned on those investments.
- **Nature**: This income is usually passive; it does not require active involvement after the initial investment is made. Capital gains are realized when an asset is sold for more than its purchase price, and the gains reflect the appreciation of the asset over time.

In summary, earned income comes from work and active involvement, while capital gains or portfolio income comes from investments and the appreciation of assets, typically with less active management involved.