Ordinary Income
Income taxed at regular income tax rates, including wages, salaries, interest, and short-term capital gains.
What is Ordinary Income?
Ordinary income is income that is taxed at the standard progressive income tax rates (up to 37% federally in 2025), as opposed to the preferentially lower rates that apply to long-term capital gains and qualified dividends. Ordinary income includes wages, salaries, tips, freelance income, business income, interest income, non-qualified dividends, short-term capital gains (on assets held one year or less), rental income, and retirement account distributions. The distinction between ordinary income and capital gains income is one of the most important in tax planning, since long-term capital gains rates (0%, 15%, or 20%) are substantially lower for most taxpayers.
Example
A taxpayer earns $80,000 in wages (ordinary income) and $20,000 from selling stock held 8 months (short-term capital gain = ordinary income). All $100,000 is taxed at ordinary rates. If instead they held the stock 13 months, the $20,000 would be a long-term capital gain taxed at 15% — saving $1,400–$4,000 in taxes depending on their bracket.