Final answer:
Defined by the IRS, passive activities are investments that do not involve active management by the investor, and losses from such investments are only applicable against passive income for tax purposes.
Step-by-step explanation:
A typical example of a passive activity is an interest in a rental property or limited partnerships where the individual is not actively involved in the management of the investment. Passive activities are defined by the Internal Revenue Service (IRS) for tax purposes and include businesses or trade activities in which the person does not materially participate. Losses from passive activities can generally only be used to offset income from other passive activities, not active business income or wages. The aim is to prevent individuals from reducing their taxable income by offsetting it with losses incurred from passive activities in which they are not materially involved.