The idea of passive income is not a recent one – it gained significant traction in the latter part of the 20th century, and well into the 21st. It hit its zenith with the rise of the internet and the digital technology that comes with it, mainly because of the various passive income streams that it enables. These include affiliate marketing, content creation, e-books, online courses, and the like. Rising prices, combined with the combined disinclination of corporations to compensate their employees fairly for their contributions have also resulted in the number of people looking to supplement their income or achieve financial independence climbing steadily. Gone are the days when people could expect to live off the income they made at their 9 to 5. Books such as Robert Kiyosaki’s ‘Rich Dad Poor Dad’. Tim Ferriss’s ‘The 4-Hour Workweek’ has also played a crucial role in popularising the concept of passive income.
But what really is passive income? Passive income is an income stream that you have to work relatively little for. It’s incorrect however to believe that the compensation you are receiving is disproportionate to the ‘value’ of the work that you are doing. There is always a reason why the work you do, whatever it is, is valued the way it is. Having a source of passive income means that you have money clicking into your bank account even when you are off the clock. It takes the pressure off of your primary course of income and earns you money even when you are off on a break. Whatever venture earns you your passive income however may be expensive at the outset, be it in terms of effort, resources, or time. Another important point to remember is that the U.S.’s Internal Revenue Service does not ignore passive income. One characteristic they look out for is the ‘material participation’ of the taxpayer, which helps them determine whether they have been actively involved in producing the income under consideration. Fortunately, however, the IRS defines passive income as ‘unearned income’ and taxes them at significantly lower rates.
There are three categories of income or earnings: active, passive, and portfolio. Passive income is not to be confused with portfolio income, although they do share similar elements. Investment returns are not passive income – rather, the returns generated through your investments in securities, stocks, bonds, and crypto wallet are portfolio income. The interest generated by your savings account on the other hand qualifies as passive income. Active income (or earned income) is what we are most used to the compensation we receive for our direct efforts or work, such as commissions, revenue, tips, or wages. Most households depend upon active income as their main source of earnings, and it’s a fortunate few that earn enough passive income to rely on it completely. Active income is also subject to the standard income tax rates that the IRS implements.
When it comes to tax implications, a loss on passive income-generating income can only be offset against that particular income category, and not from your income as a whole. Listing your passive activities appropriately will ensure that you make the most of the tax deduction benefit. One way of making the paperwork easier for yourself is by grouping passive activities together into an ‘appropriate economic unit’. This means that you need only provide evidence of material participation in the category as a whole, instead of each of the different activities. In the event that you are told to remove one of the activities, you can remove just the one, without having to remove the entire category. Grouping these separate activities requires that either the activities take place in the same geographical area, have similarities in the type of business they engage in, or are in some way interdependent.
But what are some easy ways of generating passive income?
Renting out property has always been a popular method of generating additional income. Unfortunately, not everyone has enough property to rent out or the time and resources needed for their upkeep. However, it may still be possible to rent out part of the property you live in or sublet it. If you live in an area that is experiencing property value growth, it may be more profitable for you to rent out your own living space and move out into somewhere cheaper. As many people are quickly learning, short-term renting is a brisk business that has tremendous potential. There still might be avenues to make good use of the space available to you however, such as renting out storage space. Provided that you can rent out this space at least fractionally lower than commercial warehouses, there should be a buyer for you somewhere, especially in urban areas where storage is at no less than a premium.
You can also offer any specialist items or tools that you might have for rent. This may range from power tools to baking equipment to fishing gear to crafting equipment. Vehicles are also good assets to rent out, provided that you ensure that any damages can be recovered without too much inconvenience. An airtight rental agreement is your friend in this respect. Cars also count as valuable advertising space, which is why it’s a good idea to keep your eyes peeled for businesses looking to make the best use of their marketing funds. Creating online content is generally seen as a reliable and easy way to create a neverending trickle of money – one that may turn into a gushing torrent at any moment. Success in this particular sphere however depends on consistency, even in the face of what will appear to be ongoing failure for a long, long time. However, when it comes, even success on social media can come at more expense than can be imagined. Affiliate marketing, advertising, and sponsorships can yield economic benefits both monetary and otherwise.
Online content generation needn’t be limited to social media, however. You can share your expertise and skills by creating online courses, which have the benefit of encompassing several different mediums, from videos, documents, and presentations to lectures, quizzes, timed exams, and so on. Selling stock photos can also be a helpful source of passive income. while giving you the space to practice your hobby. All you need to do is keep uploading shots, and keeping at it after they start generating revenue. Another way of exerting your creative chops online is the design of custom products on websites such as Etsy or Shopify. Credible product design is a hugely successful market to cater to.
Ultimately, there is no real limit to what can be put on sale to the enormous, vastly shifting market that the internet gives you access to. In the 21st century, many would argue that it is the most important key in achieving true financial freedom.
(Theruni M. Liyanage)