Character is the type of income to calculate the taxpayer's tax liability. In the United States, the Supreme Court decided ( Commissioner v. Glenshaw Glass Co.) that income is an accession to wealth, however capital gain is of different character from

ordinary income Under the United States Internal Revenue Code, the ''type'' of income is defined by its character. Ordinary income is usually characterized as income other than long-term capital gains. Ordinary income can consist of income from wages, salar ...

. Ordinary income includes earned wage income and

interest income Passive income is unearned income that is acquired automatically with minimal labor to earn or maintain. It is often combined with another source of income, such as a side job. In the United States, the IRS divides income into three categories ...

from lending.

Capital Income

U.S.

The

IRS The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory tax ...

characterizes income or loss as a capital gain or loss depending on how the taxpayer generates the gain or loss. When the taxpayer invests in real estate or security and then later sells that piece of real estate or security, the IRS characterizes the amount that exceeds the purchase price as capital income while the amount that falls short of the purchase price is capital loss. The IRS refers to the purchase price as the

tax basis Under U.S. federal tax law, the tax basis of an asset is generally its cost basis. Determining such cost may require allocations where multiple assets are acquired together. Tax basis may be reduced by allowances for depreciation. Such reduced ba ...

. When the IRS characterizes income as capital gain, it enjoys a lower tax rate than ordinary income.

Ordinary Income

U.S.

The IRS characterizes ordinary income as income generated from earned wage income or interest income earned from lending. The IRS taxes ordinary income according to a progressive rate determined by the amount of income. It is a

progressive income tax A progressive tax is a tax in which the tax rate increases as the taxable amount increases.Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), ''Concepts of Taxation'', Dryden Press: Fort Worth, TX The term ''progre ...

Capital Income

U.S.

Ordinary Income

U.S.

See also