What Is Passive Income? Types and Examples

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Passive income is money you earn from an asset or business that you don’t have to actively work on day to day, like a rental property, a dividend-paying stock, or a digital product. It’s different from a paycheck, where you trade active work for income.

You can earn passive income without trading time for pay, but building it takes work. This could look like saving investment capital, building a product, or establishing and maintaining the systems that run your business.

This guide covers what counts as passive income under IRS rules, the different types you can build, and what several of them realistically pay, plus how passive income is taxed once you start earning it.

What is passive income?

Passive income is revenue generated with minimal participation. It’s the opposite of active income, which involves directly exchanging time or labor for money.

The IRS defines passive income more narrowly. Under Publication 925, passive income includes only income from rental activities and from businesses you don’t materially participate in, meaning you’re not involved in operations on a regular, continuous, and substantial basis.

This means the IRS definition excludes portfolio income, such as interest, dividends, annuities, and royalties not earned from a trade or business. It also excludes income from intangible property such as patents, copyrights, or compositions that you significantly contributed to creating.

Passive income also has its own risks. Investments can lose value, rental properties can take time to fill, and digital products might not sell as planned, so these returns aren’t guaranteed.

Is passive income a real thing?

Passive income is real, although not necessarily as passive as the name suggests. Building it takes significant upfront work or money, like writing a book you plan to sell, developing a curriculum for an online course, or choosing and purchasing a rental apartment.

Setting up a passive income stream can mean working unpaid and hoping your efforts pay off over months or years. There’s also the work of managing your content, services, or products. And you may need to market your offering to reach its target audience.

While passive income can be part of a business model, it’s worth being skeptical of any opportunity that promises guaranteed results with little effort. Businesses usually require upfront work, testing, and ongoing attention. That’s one reason regulators have taken action against some business opportunity schemes, including a 2025 FTC settlement involving Click Profit, whose operators allegedly made false claims about guaranteed online store earnings.

Despite schemes like that one, passive income remains a legitimate way to build an additional revenue stream alongside active employment. For online passive income models, ecommerce platforms like Shopify let you automate tasks like order fulfillment, cutting down the time you need to spend monitoring your business.

Passive income vs. active income

The main difference between passive and active income comes down to when you put in the work and when you get paid for it:

• Active income. You get paid as you work, through a salary, hourly wages, or freelance fees. When the work stops, the pay stops.
• Passive income. You put in time or money upfront, like writing a song or buying a rental property, and get paid later. The income can continue for months or years, though the asset may still need upkeep.

Federal Reserve data show 57% of US adults received some non-labor income in 2025, including 37% with interest, dividends, or rental income, and 30% of all adults’ income varied at least occasionally throughout the year.

That variability is one reason passive income may suit a diversified income mix rather than replace an active income. Dividends and rental payments don’t always arrive as predictably as a paycheck, so pairing passive and active revenue streams can keep your income feeling more stable.

Types of passive income streams

There are three main types of passive income: investment-based income, real estate-based income, and business or creative income. Here are six ways you can build one or more of these types of passive income:

• Product and service fees
• Marketing and advertising commissions
• Royalties
• Business dividends
• Rental income
• Loan and lease repayments

Product and service fees

Creating an app or software-as-a-service (SaaS) can generate passive income. Once the initial development is done, these digital products can keep generating revenue with little additional work, especially if they’re subscription-based.

Developers can reach buyers directly through the Shopify App Store. With the Shopify Partner Program, developers earn a share of the revenue their app generates from subscriptions.

Marketing and advertising commissions

Affiliate marketing is another way to earn passive income. You promote other people’s products and earn a commission for every sale made through your referral link.

You can also earn ad revenue from videos you upload to a YouTube channel. Turning on ad revenue sharing through the YouTube Partner Program requires 1,000 subscribers plus either 4,000 public watch hours on long-form videos in the past 12 months or 10 million Shorts views in the past 90 days.

Another option is to generate money from sponsorships of Instagram posts or podcast episodes. Many social media platforms allow you to monetize your content.

Royalties

Earning royalties from a book you’ve written, a song you’ve composed, or a patent you’ve invented is another form of passive income. You earn a royalty each time someone buys or licenses your work, at the rate set out in your contract.

Business dividends

Investing in businesses can be another source of passive income. For example, if you buy shares in a publicly traded company, you can earn passive income in the form of dividends. You’re not actively involved in the day-to-day operations of the company, but as a shareholder, you’re entitled to a portion of the profits.

The IRS treats dividends as unearned income and as portfolio income, not passive activity income.

Rental income

Unless you qualify as a real estate professional under IRS rules, rental income counts as passive income. Once you purchase a property and start renting it out, you may generate profits after paying the mortgage payment and other expenses.

Loan and lease repayments

Leasing equipment and lending assets can also generate passive income. You purchase an asset, lease it out, and earn income from the payments.

Ways to generate passive income

Here are a few methods you can try out to start generating passive income, each with its own upfront effort, cost, and time to first revenue:

• Design print-on-demand products
• Become an affiliate marketer
• Create online courses
• Sell digital products
• Get sponsored
• Dropship products
• Buy or invest in a private business
• Earn rental income
• Invest in the stock market
• Engage in peer-to-peer lending

Design print-on-demand products

Print-on-demand lets a seller create designs that a supplier prints and ships when a customer places an order. Here’s what’s involved:

• Upfront effort: Create designs, order samples, and list your products.
• Upfront cost: Store fees, samples, and any paid promotion. Production costs come after orders are placed.
• Time to first revenue: After your first sale. Timing depends on demand and promotion.
• Limitations to consider: Supplier costs and advertising reduce profits. You still need to market products and help customers.

Become an affiliate marketer

Affiliate marketers earn a commission when someone buys through their referral link. In a November 2025 survey of 500 Shopify store owners, 37% cited marketing as their top year 1 challenge, with 36% saying that finding customers was theirs.* Affiliate marketing depends on the same thing: reaching an audience. Here’s what it takes:

• Upfront effort: Create content, attract an audience, and join affiliate programs.
• Upfront cost: Website fees and any tools you use to create or promote content.
• Time to first revenue: After someone makes a qualifying purchase through your link. Each program sets its payment schedule.
• Limitations to consider: Commission rates can change. Keeping people interested often requires fresh content.

Create online courses

Online courses can be recorded videos, in-depth ebooks, or interactive lessons that offer a hands-on experience (or a mix and match). AI tools can speed up drafting lessons and course materials, but they don’t find students for you, so promotion takes the same work. To get started:

• Upfront effort: Plan lessons, create course materials, and set up enrollment.
• Upfront cost: Recording equipment, software, and platform fees, depending on your setup.
• Time to first revenue: After your first paid enrollment. An existing audience can help you attract students sooner.
• Limitations to consider: Courses need promotion, updates, and time to answer students’ questions.

Sell digital products

Digital products like templates, art, or software are created once and can be sold unlimited times without replenishing inventory. Here’s what to expect:

• Upfront effort: Create the product, write a listing, and set up delivery with Shopify’s Digital Products app, which sends files automatically after checkout.
• Upfront cost: Creation tools and store fees.
• Time to first revenue: After your first purchase. There’s no set timeline for finding a buyer.
• Limitations to consider: You still need to promote products and answer questions. Some products also need updates.

Get sponsored

Sponsorships pay you to mention or use a brand’s product on a podcast, in a video, or at an event. Here’s what’s involved:

• Upfront effort: Build an audience and approach brands that want to reach those people.
• Upfront cost: Any equipment, software, or other expenses needed to produce your content.
• Time to first revenue: Once you secure a sponsorship. The agreement sets when you get paid.
• Limitations to consider: Each deal usually requires new content or appearances, so the income involves ongoing work.

Dropship products

With dropshipping, a third-party supplier ships orders directly to the customer, so the retailer doesn’t have to hold any inventory. Here’s what it takes:

• Upfront effort: Find suppliers, test products, and set up your store.
• Upfront cost: Store fees, samples, and promotion. You don’t buy inventory in bulk.
• Time to first revenue: After your first sale. Timing depends on demand, pricing, and marketing.
• Limitations to consider: You have limited control over shipping and product quality, but customers still come to you with problems.

Buy or invest in a private business

Investing in a private business means funding someone else’s company for a share of future profits. Buying an existing business lets you purchase cash flow that already exists. Either way, expect:

• Upfront effort: Review the business’s finances, debts, and management before committing money.
• Upfront cost: The investment or purchase price, plus professional fees. Buyers also need money to run the business.
• Time to first revenue: Varies. Investors earn through distributions or a sale, which can take years. Buyers earn once cash flow covers the business’s costs.
• Limitations to consider: You can lose money, and selling your stake can be difficult. Running the business yourself requires ongoing work.

Earn rental income

Buying property and renting it out to a tenant is a common form of real estate passive income. Here’s what’s involved:

• Upfront effort: Buy and prepare a property, then find tenants.
• Upfront cost: A down payment or full purchase price, plus closing costs and repairs.
• Time to first revenue: When rent is due under the lease. Finding a tenant can take time.
• Limitations to consider: Vacancies, repairs, and property expenses reduce earnings. Hiring a property manager adds another cost.

Invest in the stock market

Dividend-paying stocks pay shareholders part of the company’s profits. As of the fourth quarter of 2025, 409 companies, or 81.3% of the S&P 500, paid a dividend. Here’s what it takes:

• Upfront effort: Research investments and review them periodically.
• Upfront cost: Money to invest, plus any brokerage fees. Fractional shares let you invest smaller amounts.
• Time to first revenue: On a scheduled dividend payment date, if you bought the shares in time to qualify.
• Limitations to consider: Share prices can fall, and companies can reduce or stop dividend payments.

Engage in peer-to-peer lending

Peer-to-peer (P2P) lending connects individual lenders and borrowers through an online platform. Interest rates vary depending on the borrower’s credit score. Here’s what to expect:

• Upfront effort: Compare platforms, review loan risks, and decide how much to invest.
• Upfront cost: Money to lend, subject to the platform’s minimum investment and fees.
• Time to first revenue: As borrowers make repayments, often monthly.
• Limitations to consider: Borrowers can miss payments or default. Most P2P loans are unsecured personal loans, and you could lose your entire investment. Each repayment includes some of your original investment, so it isn’t all profit.

How much can you make from passive income?

The amount you can make from passive income varies widely. It could be a little cash each month, or a substantial yearly income. It all depends on what you’re selling and how scalable it is.

Take investing, for example. NYU-Stern data puts the S&P 500’s compound annual return at about 10% from 1928 to 2025. That figure combines dividends with rising share prices, and you only collect share-price gains when you sell. That beats the 3.5% annual percentage yield (APY) on a Marcus by Goldman Sachs high-yield savings account.

Online content creators can earn passive income, too, though many don’t earn a full-time living from it. Among more than 3,000 creators surveyed by NeoReach in 2025, 50.71% earned less than $15,000 a year from content creation, and nearly 57% of full-time creators earned below the $44,000 US living wage from content alone.

Here’s a simple example of how the math works for a digital product. Say a $15 digital planner nets around $14 after payment processing fees. If you can sell five copies a day, that works out to roughly $2,100 a month. That assumes a steady stream of buyers and doesn’t include advertising costs.

Some passive income streams scale without adding much cost. A digital product or online course earns the same amount per sale, whether you’ve sold 10 copies or 10,000, since there’s no inventory to replenish. But rental income and equipment leasing work differently, as they’re capped by how many properties or assets you own. To earn more through those methods, you have to buy more.

How passive income is taxed

How passive income is taxed depends on the income type, since the IRS treats investment income, rental income, and business income differently.

The IRS taxes dividends, interest, and capital gains as portfolio or capital gains income, not under its passive activity rules. If your modified adjusted gross income exceeds $200,000 as a single filer or $250,000 filing jointly, a 3.8% net investment income tax applies on top of regular income tax. It also covers rental, royalty, and passive business income.

Rental income and income from a business you don’t materially participate in fall under the IRS’s passive activity rules. Losses from these activities can offset only other passive income, with exceptions for real estate professionals and landlords who actively participate and can deduct up to $25,000 in rental losses.

Passive income can also affect Social Security. If you’re younger than full retirement age and collecting benefits, the earnings test only counts wages and net self-employment income, not investment earnings, interest, pensions, annuities, or capital gains. That means most passive income doesn’t reduce your benefit. But passive income does raise the income the IRS uses to decide whether your benefits are taxable.

Store owners selling digital products to customers in the European Union need to account for VAT separately. The EU charges VAT based on the customer’s location rather than the seller’s, and businesses can register for the One Stop Shop (OSS) scheme to file and remit VAT for all EU sales through a single return instead of registering in each country.

How to start earning passive income

If you want to get started with passive income, follow these steps:

1. Pick one income stream that matches your skills, budget, and available time. Tackling one at a time can be better than trying to build several at once.
2. Save or set aside the capital you need, whether that’s money to invest, buy or create inventory, or buy a property.
3. Build or buy the asset itself. For example, write your course, list your product, or close on your property.
4. Set up the systems that keep it running with minimal ongoing input, like automated fulfillment or a property manager.
5. Track your results for a few months before deciding whether to reinvest, expand, or move on.

*Based on a 2025 survey of 500 Shopify merchants conducted in English across Australia, Canada, the United Kingdom, Ireland, New Zealand, and the United States. Respondents were established merchants with more than two years on the platform. Results reflect the experiences of this specific sample and may not be representative of all merchants.