Question

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

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

Answer 1

Earned income is payment for employment, while capital gains are produced by your investments.

Step-by-step explanation:

Statement B)

Earned income is payment for employment, while capital gains are produced by your investments. Earned income refers to the income you receive in exchange for your labor, such as wages, salaries, commissions, and tips. It is the direct result of your work. On the other hand, capital gains are the profits you make from selling an asset, such as stocks, real estate, or artwork, at a higher price than what you initially paid for it.

Earned income is tied to employment, while capital gains are tied to investments.

For example, if you work as an employee at a company, your income would be considered earned income. However, if you invest in stocks and later sell them at a higher price, the profit you make would be considered a capital gain.