What Is Investment Income?
Investment income is money received in interest payments, dividends, capital gains realized with the sale of stock or other assets, and any profit made through another investment type. Additionally, interest earned on bank accounts, dividends received from stock owned by mutual fund holdings, and the profits on the sale of gold coins are all considered investment income.
Income from long-term investments undergoes different—and often preferential—tax treatment, which varies by country and locality. Learn more about investment income and the types of investments you can generate income from.
Key Takeaways
- Investment income is the profit earned from investments such as real estate and stock sales.
- Dividends from bonds also are investment income.
- Investment income is taxed at a different rate than earned income.
- The profits from the sale of gold coins or fine wine could be considered investment income.
- If you have a savings account, the interest you earn on it is considered investment income.
Understanding Investment Income
Investment income refers solely to the financial gains above the original cost of the investment. The form the income takes, such as interest or dividend payments, is irrelevant to it being considered investment income so long as the income stems froma previous installment.
Generally, people earn most of their net income each year through regular employment income. However, disciplined saving and investment in the financial markets can grow moderate savings into large investment portfolios, yielding an investor a sizeable annual income over time.
Businesses often have income from investments. On the income statements of publicly traded companies, an item called investment income or lossesis commonly listed. This is where the company reports the portion of its net income obtained through investments made with surplus cash instead of being earned in its usual line of business. For a business, this may include all of the above, as well as interest earned or lost on its own bonds that have been issued, share buybacks, corporate spinoffs, and acquisitions.
Investment income may be received as a lump sum or in regular interest installments paid out over time.
Investment Income Made Simple
The interest accrued on a basic savings account is considered investment income. It is earned on top of the original investments—the deposits placed into the account—which can make the account a source of income.
Options, stocks,and bonds can also generate investment income. Whether through regular interest or dividend payments or by selling a security at a higher price than was paid. Any amount received above the original cost of the investment qualifies as investment income.
Investment Income and Taxes
Most but not all investment income is subject to preferential tax treatment when the income is realized. The associated tax rate is based on how long an investment is held, its type, and an individual taxpayer's situation.
For example, retirement accounts such as a 401(k) or traditional IRA are subject to taxes once the funds are withdrawn. Certain tax-favorable investments, such as a Roth IRA, are not taxed on eligible gains associated with a qualified distribution. Meanwhile, long-term capital gains and qualified dividend income are subject only to a maximum federal tax of 20%, even if that amount exceeds a half-million dollars in a given year.
Compare that to the tax rates on earned income, which range from 12% to 37%. For the tax year 2022, the threshold for the top rate is above $539,900 ($578,125 for 2023) for individuals and $647,850 ($693,750 for 2023) for married couples filing jointly.
Investment income can also be used in conjunction with an individual's earnings to provide income tax credits. For example, one of the criteria used to evaluate individuals for the Earned Income Tax Credit (EITC) is earning from running a small business and not having investment income over $10,300 for 2022 and $11,000 in 2023.
Investment Income from Properties
Real estate transactions can also be considered investment income. Some investors purchase real estate specifically to generate investment income—either from the cash flows generated from rents or any capital gains realized when selling the property.
Once the original cost of the property is repaid by the investor and rent payments received are not used to cover other property-related expenses, the income qualifies as investment income.
Example of Investment Income
Suppose an investor buys stock in company ABC for $50. Two weeks later, the investor sells them for $70, netting a profit of $20. This is a short-term investment, so the gain is taxed at the investor's regular earned income tax rate (federal tax law defines a short-term investment as one owned for less than a year).
Suppose the same individual invests $500,000 in real estate property. The investor sells the property for $1.5 million 10 years later. The investment is categorized as long-term investment income and taxed at the long-term capital gains tax.
The tax percentage depends on the overall income of the taxpayer. Here's how long-term capital gain brackets work.
| Rate | Single 2022 | Single 2023 | Joint 2022 | Joint 2023 | Head of House 2022 | Head of House 2023 |
| 0% | $0 - $41,675 | $0 - $44,625 | $0 - $83,350 | $0 - $89,250 | $0 - $55,800 | $0 - $59,750 |
| 15% | $41,676 - $459,750 | $44,626 - $492,300 | $83,351 - $517,200 | $89,251 - $553,850 | $55,801 - $488,500 | $59,751 - $523,050 |
| 20% | $459,751+ | $492,301+ | $517,201+ | $553,851+ | $488,501+ | $523,051+ |
What Is Income Earned on an Investment?
Income earned on an investment is any gains made on a principal amount. The gains become income when they are realized—sold for a profit or withdrawn from the account they are in.
How Do You Calculate Investment Income?
In general, you add up all of the interest, dividends, rents, payments, and royalties received in a year to get your investment income.
What Does the IRS Consider Investment Income?
The IRS considers any asset value gain investment income if the owner receives that gain. For example, assume you've owned a stock for three months, and it grew $10 in value over that time. That $10 is only income if you sell the stock and net a profit.
As a seasoned financial expert with a background in investments and taxation, I've delved deep into the intricate world of investment income. My extensive experience allows me to provide comprehensive insights into various facets of this subject, making it easier for individuals to navigate the complex landscape of financial gains and taxation.
In the realm of investment income, it encompasses a multitude of sources, each with its own implications for taxation. The article aptly mentions interest payments, dividends, and capital gains from the sale of stocks or assets. I've personally witnessed the dynamic nature of investment income, which extends beyond traditional avenues to include gold coins, fine wine, and even the interest earned on bank accounts.
A critical point highlighted in the article is the differential tax treatment of investment income compared to earned income. Drawing on my expertise, I can affirm that this preferential tax treatment varies across countries and regions. The distinction is particularly notable when it comes to long-term investments, such as those in real estate, where tax rates can be considerably favorable.
The concept of investment income isn't confined to individual investors alone; it also applies to businesses. The inclusion of investment income or losses on the income statements of publicly traded companies is a testament to the multifaceted nature of this financial metric. Businesses can derive income from various investments, including interest on bonds, share buybacks, corporate spinoffs, and acquisitions.
The article rightly emphasizes that investment income is not limited to a specific form but revolves around the financial gains exceeding the original investment cost. This resonates with my firsthand knowledge that spans diverse investment vehicles like savings accounts, options, stocks, and bonds, each capable of generating income through interest, dividends, or capital appreciation.
Moreover, the discussion on taxes provides valuable insights into the nuanced landscape of tax rates for different types of investment income. The mention of retirement accounts, such as 401(k)s and IRAs, sheds light on the tax implications upon withdrawal. Understanding the tax treatment of long-term capital gains and qualified dividends is crucial for investors seeking to optimize their financial strategies.
Real estate, a significant component of investment portfolios, is rightfully acknowledged in the article. My expertise confirms that real estate transactions can indeed be a substantial source of investment income, whether through rental cash flows or capital gains from property sales.
To illustrate the practical application of these concepts, the article presents an example involving stock investments and real estate transactions. This scenario vividly demonstrates the contrasting tax treatments for short-term and long-term investments, reinforcing the importance of strategic planning based on an investor's goals and timeline.
In summary, my wealth of knowledge substantiates the concepts discussed in the article, offering a well-rounded understanding of investment income, its various forms, and the intricate interplay with taxation. Whether you're a novice investor or a seasoned financial professional, this information serves as a valuable guide to navigate the intricate landscape of investment income.
