The Compound
5 Flavors of Income
10/29/2025, 10:49:13 PM
Economic Summary
- The IRS recognizes five broad categories of income (ordinary wages, interest/dividends, capital gains, passive rentals, IRA/annuity distributions); for typical brokerage accounts, capital gains are the primary category that matters when selling securities.
- Investors can employ tax-loss harvesting — e.g., holding a broad basket of stocks so losers offset winners — to reduce taxable gains when liquidating positions for cash needs like buying a car or vacation.
- Certain other tax treatments (business gains, partnership income, installment income, and depreciation rules for Section 1231 property) can sometimes be leveraged to change tax outcomes, but they require specific circumstances and expertise; legislative fixes would need congressional action, which can be delayed by government shutdowns.
Bullish
- Tax-loss harvesting across a diversified basket can offset gains and reduce taxable income.
- Business gains, rental depreciation (Section 1231), or partnership/installment income can sometimes be used strategically.
Bearish
- Tax deductions for selling investments are largely limited to capital gains rules, restricting flexibility.
- Complex IRS rules (depreciation recapture, 1231 property) create uncertainty and potential unexpected tax liability.
- Government shutdowns and legislative delays hinder meaningful tax-code changes for investors.
People mentioned
Bill ArtsSteve