Formally, IRS stated two types of passive income activities:
Trade or business activities (ones that don't require material participation)
Rental activities
According to this, passive income comes from financial investments like mutual funds, the stock market, rental income, and other streams. But with the increasing technology, countless other digital methods have been added to the list of passive income streams.
As per IRS regulation, the government taxes your passive income differently. The department has specific material participation rules to determine if your income-producing activity requires active participation and adjusts your tax accordingly.