When people talk about passive income in everyday conversation, they often refer to earnings that require minimal ongoing effort. The idea of “making money while you sleep” is appealing, and examples of such income streams include: Dividend-paying stocks: Regular payouts from investments in publicly traded companies. Rental income: Income from leased property. Royalties: Earnings from intellectual property, such as books, music, software, or commodities like oil and gas. Interest from bank accounts: Earnings from savings or checking account balances. Income from bonds: Income generated from fixed-income investments like government or corporate bonds. In this context, passive income is viewed as a way to achieve financial freedom and reduce reliance on traditional employment. However, these streams often require significant upfront effort or capital investment before becoming truly “passive.” The IRS Definition of Passive Income The IRS has a more specific definition of passive income, which primarily includes earnings from activities in which the taxpayer does not materially participate. According to the IRS, passive income typically comes from two sources: Rental Activities: Unless you qualify as a real estate professional, income from rental properties is considered passive