Portfolio Income
Portfolio income is income derived from investments, including dividends, interest, royalties, and capital gains from the sale of investment assets. Under the IRS passive activity rules, portfolio income is treated as a separate category distinct from both active income and passive income, meaning it generally cannot be offset by passive activity losses.
The Internal Revenue Code designates portfolio income as a separate income category that is neither active (earned) income nor passive income under the passive activity loss rules of Section 469. This classification matters because passive activity losses — such as those generated by rental real estate or limited partnership interests — cannot be used to offset portfolio income. This prevents a common tax shelter structure in which investment losses from passive sources are used to shelter dividend and interest income.
Portfolio income includes interest income from savings accounts, CDs, bonds, and money market funds; dividends from corporate stocks and equity mutual funds; capital gains from the sale of stocks, bonds, options, and other investment assets; royalties received in connection with an investment activity rather than an active business; and annuity income in certain circumstances.
The tax rates applicable to portfolio income vary widely by type. Qualified dividends and long-term capital gains are taxed at preferential rates of 0%, 15%, or 20% depending on taxable income. For 2025, the 0% rate applies to married filers with taxable income up to $96,700 and single filers up to $48,350; the 20% rate applies above $583,750 (married) and $518,900 (single). Ordinary dividends, short-term capital gains, and most interest income are taxed as ordinary income at marginal rates up to 37%.
Portfolio income is also subject to the 3.8% Net Investment Income Tax (NIIT) for taxpayers whose MAGI exceeds $200,000 (single) or $250,000 (married filing jointly). This surtax, introduced by the Affordable Care Act, applies to the lesser of net investment income or the excess of MAGI over the applicable threshold. Interest, dividends, capital gains, passive rental income, and passive business income are all included in net investment income for NIIT purposes.
For investors, portfolio income flows from various IRS information returns: interest is reported on Form 1099-INT, dividends on Form 1099-DIV, and proceeds from sales on Form 1099-B. Pass-through entities such as partnerships and S corporations also allocate investment-type income to investors via Schedule K-1.
The distinction between portfolio income and passive income can be nuanced for certain royalties and income from S corporations, requiring careful analysis of the source and the taxpayer's level of participation.