What type of income includes interest, dividends, and capital gains?

The classification of income that includes interest, dividends, and capital gains is known as unearned income. This type of income is distinct from earned income, which is derived from work or services rendered. Unearned income typically consists of earnings received from investments or accounts where the individual is not actively involved in generating that income. Interest earned from bank accounts, dividends paid from stocks, and capital gains from the sale of investment assets all fall under this category, as they do not require ongoing labor or effort from the individual.

Understanding unearned income is crucial for tax purposes because it is often taxed differently compared to earned income. Individuals need to report such income on their tax returns and may be subject to different tax rates. This distinction helps clarify how various income sources are treated under tax law.