Income Basket – Definition

Cite this article as:"Income Basket – Definition," in The Business Professor, updated March 20, 2019, last accessed November 26, 2020,


Income Basket Definition

The US tax code defines an Income Basket as a taxable source of income from either active, passive, or portfolio gains. For e.g., monthly salary would be taxed under the Active Income Basket, while rent from a property would be taxed under the Passive Income Basket. Profits accrued on trading accounts would be taxed under the Portfolio Basket. Losses made in one basket cannot offset gains in another basket. Income Baskets help taxpayers track their gains and losses easily.

A Little More on What is an Income Basket

Let’s say ‘X’ has a salary of $60,000 per annum. X invests $6000 in a business venture. Due to various reasons, the ROI on this amounts to $3000 at the end of the year. X’s net loss for the year stands at $3000. So the total taxable income amounts to $57,000. This amount would be taxed under the Active Income Basket with the losses accounted for. The Active Income Basket also includes business profits, commissions, tips, wages for services rendered, and so on.

The Passive Income Basket is the taxable income that was made without any efforts or investments in the current financial year. E.g., royalties from a music catalog, rented money from a house that was bought long before the beginning of the current financial year that tax is being paid for, or income as a sleeping partner of a business venture. The taxpayer derives this income without having any financial or operational commitments to the source of this income.

Portfolio Income Basket includes profits made in stocks, options, dividends, capital gains and interest. Investment made in properties with the sole purpose of receiving royalties is also taxed as Portfolio Income.

How Income Baskets Benefit The Treasury

The Internal Revenue Services (IRS) find Income Baskets immensely helpful in identifying and blocking tax fraudulent tax reports. Since gains and losses are taxed separately for each basket, taxpayers cannot get away with rewriting losses made in the Portfolio Basket towards profits made from rented property. Taxes will be deducted separately for profits in the Active Income Basket, and losses will be written off only for the investments made in the Portfolio Basket. If all different sources of income were taxed as one, it would be really difficult to detect fraudulent tax reporting.

References for Income Baskets

Academic Research for Income Basket

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