Identify how the passive activity loss rules broadly classify various types of income and losses. Provide examples of each category

The passive activity loss rules require income and losses to be classified into one of three categories: active, passive, or portfolio. Active income includes salary and wages, profit from a trade or business in which the taxpayer is a material participant, and gain on the sale of assets used in an active trade or business. Portfolio income includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. The final category, passive activity income or loss, is generated by a passive activity. The following activities are treated as passive: (1) any trade or business or income-producing activity in which the taxpayer does not materially participate, and (2) subject to exceptions, all rental activities, whether the taxpayer materially participates or not.