What counts as ordinary income?

Common examples can include wages, salary, bonuses, taxable interest, business or self-employment income, taxable retirement distributions, and net short-term capital gain. The exact treatment depends on the type of income and applicable tax rules, so “ordinary income” should not be treated as a universal list of everything a taxpayer receives.

Is salary ordinary income?

Generally, yes. Salary and wages generally participate in the regular federal income-tax calculation. That does not mean your entire salary is taxed at one rate. Federal individual income-tax brackets are progressive, with different portions of taxable income potentially subject to different marginal rates.

Is interest ordinary income?

Taxable interest generally receives regular federal income-tax treatment rather than preferential long-term capital-gain rates. Interest is also a useful example of why ordinary income and earned income are not interchangeable concepts.

Are short-term capital gains ordinary income?

You'll often hear that short-term capital gains are “taxed as ordinary income.” That is useful shorthand, but there is an important distinction. A short-term gain remains a capital gain. After the applicable capital gain and loss netting rules are applied, net short-term capital gain generally receives regular graduated-rate treatment rather than the preferential rate structure available to eligible net long-term capital gain.

What is the difference between ordinary income and capital gains?

They describe different tax character. Ordinary income generally participates in the regular federal income-tax calculation. Capital gains arise from applicable sales or exchanges of capital assets and remain subject to the capital gain and loss rules. Eligible net long-term capital gain may qualify for preferential federal rates, while net short-term capital gain generally receives regular graduated-rate treatment.

PRISM 101

What Is Ordinary Income?

A foundational tax concept—and one that is easy to confuse with several others.

Ordinary income generally means income or gain that is subject to the regular federal income-tax calculation rather than preferential long-term capital-gain or other special rate treatment.

Common examples can include wages, salary, bonuses, taxable interest, business income, taxable retirement distributions, and net short-term capital gain after the capital gain and loss rules are applied.

But "ordinary income" does not mean the same thing as gross income, earned income, or taxable income.

Those terms answer different questions.

Gross income generally concerns what enters the federal income-tax system. Taxable income is a later calculation after applicable adjustments and deductions. Ordinary income helps describe the character and tax treatment of an amount.

That distinction matters because different types of income can appear on the same tax return while being treated differently under federal tax law.

PRISM 101 comic explaining ordinary income and how it differs from gross income, taxable income, and capital gains. — Ordinary income is one of several tax labels that can sound interchangeable until you see what each one actually describes.

What to Remember

Ordinary income is about tax character and treatment. It isn't simply another term for wages or salary.

Ordinary income is not the same as taxable income. Your taxable income is determined later in the return calculation after applicable adjustments and deductions.

Short-term capital gain requires some precision. A short-term gain remains a capital gain. After the capital gain and loss rules are applied, net short-term capital gain generally receives regular graduated-rate treatment rather than the preferential rate structure available to eligible net long-term capital gain.

Ordinary Income vs. Other Tax Terms

Several familiar tax terms describe different parts of the system.

Ordinary income vs. gross income

Gross income is the broad federal income-inclusion concept.

IRC §61 generally begins with income from whatever source derived and includes categories such as compensation, business income, gains from property, interest, rents, dividends, and annuities.

A useful distinction is:

Gross income asks what enters the federal income-tax system.

Ordinary income helps describe the character and treatment of an amount once it is there.

Ordinary income vs. taxable income

Taxable income is not simply everything you earned during the year.

Conceptually, the process looks more like:

Income → adjustments → deductions → taxable income → tax calculation

That is why someone can have $100,000 of wages without necessarily having $100,000 of taxable income.

Ordinary income vs. earned income

Earned income generally describes income connected to work or self-employment under the applicable tax rule.

Ordinary income describes something different: tax character and treatment.

Taxable interest is a simple example. It isn't wage compensation, but it generally participates in the regular federal income-tax calculation.

Ordinary income vs. capital gains

Capital gain is its own tax character.

Eligible net long-term capital gain can receive the preferential-rate calculation provided under IRC §1(h).

Short-term capital gain works differently.

A short-term gain doesn't become wage income merely because it doesn't qualify for preferential long-term capital-gain rates. Capital gains and losses are first subjected to the applicable netting rules, and a resulting net short-term capital gain generally receives regular graduated-rate treatment.

Frequently Asked Questions

What counts as ordinary income?: Common examples can include wages, salary, bonuses, taxable interest, business or self-employment income, taxable retirement distributions, and net short-term capital gain. The exact treatment depends on the type of income and applicable tax rules, so “ordinary income” should not be treated as a universal list of everything a taxpayer receives.
Is salary ordinary income?: Generally, yes. Salary and wages generally participate in the regular federal income-tax calculation. That does not mean your entire salary is taxed at one rate. Federal individual income-tax brackets are progressive, with different portions of taxable income potentially subject to different marginal rates.
Is interest ordinary income?: Taxable interest generally receives regular federal income-tax treatment rather than preferential long-term capital-gain rates. Interest is also a useful example of why ordinary income and earned income are not interchangeable concepts.
Are short-term capital gains ordinary income?: You'll often hear that short-term capital gains are “taxed as ordinary income.” That is useful shorthand, but there is an important distinction. A short-term gain remains a capital gain. After the applicable capital gain and loss netting rules are applied, net short-term capital gain generally receives regular graduated-rate treatment rather than the preferential rate structure available to eligible net long-term capital gain.
What is the difference between ordinary income and capital gains?: They describe different tax character. Ordinary income generally participates in the regular federal income-tax calculation. Capital gains arise from applicable sales or exchanges of capital assets and remain subject to the capital gain and loss rules. Eligible net long-term capital gain may qualify for preferential federal rates, while net short-term capital gain generally receives regular graduated-rate treatment.

Go Deeper

Withholding Is Not Tax Liability
What withholding actually does, and why it isn't the same as what you owe.
Marginal Rate vs. Effective Rate
How graduated rates apply to portions of income rather than the whole.
RSUs vs. ISOs
Where equity compensation lands in the ordinary and capital distinction.
What Is QSBS? Section 1202
A statutory exclusion that turns on the character of the gain.

Primary Sources

IRC §64 — Ordinary income defined.
Provides the Code's technical definition of ordinary income, particularly in distinguishing ordinary gain from capital and §1231 gain.
IRC §61 — Gross income defined.
Establishes the broad federal gross-income inclusion concept.
IRC §63 — Taxable income defined.
Provides the statutory framework for taxable income.
IRC §1 and §1(h) — Tax imposed.
Provides the individual income-tax framework and the separate calculation applicable to eligible net capital gain.
IRS Topic No. 409 — Capital Gains and Losses.
Provides IRS guidance on capital gains and losses, including the treatment of net short-term capital gain.

More foundational concepts are published in Tax Code, Simplified.