Question

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

1) Earned income and capital gains are both based on the number of hours you work.
2) Earned income is payment for employment, while capital gains are produced by your investments.
3) Capital gains are received if you manage the company, but earned income is received if you are an employee of the company.
4) Earned income is when you make the investment directly, but capital gains are when someone else has managed your investments.

Answer 1

Earned income refers to income earned through labor, such as wages and salaries, while capital gains refer to profits earned from selling investments. Earned income is directly obtained through one's labor, while capital gains result from investment activities.

Step-by-step explanation:

Earned income and capital gains (or "portfolio income") are two different types of income that individuals can earn. Earned income refers to the income that individuals receive through their labor, such as wages, salaries, and commissions, for the hours they work. On the other hand, capital gains are the profits individuals make from selling or disposing of capital assets such as stocks, real estate, or other investments.

Unlike earned income, capital gains are not earned directly through labor but rather through investment activities. When individuals invest money in assets and sell them later at a higher price, the resulting profit is considered a capital gain.

To illustrate the difference, let's consider an example: If a person works a job and receives a paycheck for their labor, that is considered earned income. However, if the same person invests some of their money in the stock market and sells the stocks at a profit, the profit they earn is considered a capital gain.