Passive income comes from involvement in a limited partnership, rental property or other activities where individuals do not have an active role. While these are most common, it is possible to earn passive income from other activities depending on IRS definitions.
When an individual earns passive income from a partnership, he must report the income on his personal tax return. As a result, the tax rate paid on passive income will vary based on the individual's personal tax bracket. The IRS has a somewhat technical process for figuring out passive income and losses that are allowable on an individual's tax return due to restrictions that do not allow this income to offset wages or compensation.
The IRS does not allow individuals to claim passive income losses to offset gains from other income areas. For example, while an individual may generate income from stocks or bonds, these are not passive income items; passive losses cannot offset the income from investment portfolios.