Question

Earned income and capital gains (or "portfolio income") are acquired in different ways. Which statement describes how they are different?

Answer 1

Earned income and capital gains are type of income. Earned income is the compensation you get from working therefore the salary you get from offering your service. On the other hand, capital gains income is acquired by selling an investment at a much higher price. Best example for this type of income is stock market investing.

Answer 2

The correct answer is:

Earned income is money earned from working.
Capital gains is money earned from selling assets or from gambling profits.

Earned income is taxed at a lower rate than capital gains is. As such, capital gains will have a greater effect on your tax return than earned income.