Earned Income vs. Other Income

Earned income is money you receive in exchange for work: a salary, hourly wages, tips, or profit from running your own business. It's the kind of income most people think of first, and it's usually what the bracket examples so far in this level have been describing.

Other income covers money that comes from sources besides your labor. Investment income is a major category here: dividends paid by companies you own shares in, interest paid on savings or bonds, and capital gains, which is profit from selling an investment for more than you paid for it. Rental income from property you own is another common example.

Money received in exchange for work, like a salary or wages, is called ____ income.

Profit from selling an investment is specifically called a capital gain, and it only exists as taxable income at the point of selling — simply watching an investment grow in value while you continue holding it doesn't create a capital gain by itself. This distinction becomes important later in this track and elsewhere in personal finance.

Which of these is the clearest example of earned income?

An investment simply growing in value while you continue to hold it automatically creates taxable capital gains that year.

This split between earned income and other income sets up the next lesson's question directly: why would a tax system ever treat these two categories differently, rather than just adding everything into one pile and taxing it the same way?