5.1.2. Portfolio Income
In addition to being taxed on the profits from selling investments that have gone up in value, investors are taxed on the portfolio income they earn. That term might be a tad confusing, because profiting from a sale may seem like income as well. But from a tax point of view, investment income consists primarily of two things—dividends and interest paid to investors on their investments.
The taxation of interest income, which is essentially “rent” paid to an investor for the use of his money, is pretty straightforward. All interest received is added up for the calendar year, any interest paid by the investor in the process of investing is subtracted from that, and the bottom line number is reported on an investor’s tax return as interest income. With two primary exceptions, the interest earned by an investor throughout the year is taxed as ordi