Investment Income: Definition, Example, and Tax Treatment

What Is Investment Income?

Investment income is money received in interest payments, dividends, capital gains realized with the sale of stock or other assets, and any profit made through another investment type. Additionally, interest earned on bank accounts, dividends received from stock owned by mutual fund holdings, and the profits on the sale of gold coins are all considered investment income.

Income from long-term investments undergoes different—and often preferential—tax treatment, which varies by country and locality. Learn more about investment income and the types of investments you can generate income from.

Understanding Investment Income

Investment income refers solely to the financial gains above the original cost of the investment. The form the income takes, such as interest or dividend payments, is irrelevant to it being considered investment income so long as the income stems from a previous installment.

Generally, people earn most of their net income each year through regular employment income. However, disciplined saving and investment in the financial markets can grow moderate savings into large investment portfolios, yielding an investor a sizeable annual income over time.

Businesses often have income from investments. On the income statements of publicly traded companies, an item called investment income or losses is commonly listed. This is where the company reports the portion of its net income obtained through investments made with surplus cash instead of being earned in its usual line of business. For a business, this may include all of the above, as well as interest earned or lost on its own bonds that have been issued, share buybacks, corporate spinoffs, and acquisitions.

Investment Income Made Simple

The interest accrued on a basic savings account is considered investment income. It is earned on top of the original investments—the deposits placed into the account—which can make the account a source of income.

Options, stocks, and bonds can also generate investment income. Whether through regular interest or dividend payments or by selling a security at a higher price than was paid. Any amount received above the original cost of the investment qualifies as investment income.

Investment Income and Taxes

Most but not all investment income is subject to preferential tax treatment when the income is realized. The associated tax rate is based on how long an investment is held, its type, and an individual taxpayer's situation.

For example, retirement accounts such as a 401(k) or traditional IRA are subject to taxes once the funds are withdrawn. Certain tax-favorable investments, such as a Roth IRA, are not taxed on eligible gains associated with a qualified distribution. Meanwhile, long-term capital gains and qualified dividend income are subject only to a maximum federal tax of 20%, even if that amount exceeds a half-million dollars in a given year.

Compare that to the tax rates on earned income, which range from 12% to 37%. For the tax year 2022, the threshold for the top rate is above $539,900 ($578,125 for 2023) for individuals and $647,850 ($693,750 for 2023) for married couples filing jointly.

Investment income can also be used in conjunction with an individual's earnings to provide income tax credits. For example, one of the criteria used to evaluate individuals for the Earned Income Tax Credit (EITC) is earning from running a small business and not having investment income over $10,300 for 2022 and $11,000 in 2023.

Investment Income from Properties

Real estate transactions can also be considered investment income. Some investors purchase real estate specifically to generate investment income—either from the cash flows generated from rents or any capital gains realized when selling the property. 

Once the original cost of the property is repaid by the investor and rent payments received are not used to cover other property-related expenses, the income qualifies as investment income.

Example of Investment Income

Suppose an investor buys stock in company ABC for $50. Two weeks later, the investor sells them for $70, netting a profit of $20. This is a short-term investment, so the gain is taxed at the investor's regular earned income tax rate (federal tax law defines a short-term investment as one owned for less than a year).

Suppose the same individual invests $500,000 in real estate property. The investor sells the property for $1.5 million 10 years later. The investment is categorized as long-term investment income and taxed at the long-term capital gains tax.

The tax percentage depends on the overall income of the taxpayer. Here's how long-term capital gain brackets work.