WordPress.com is running the same code that you can download for free at WordPress.org ... the biggest difference is that .com is run by a for-profit company and .org is maintained by a non-profit community.
WordPress.com, as a for-profit enterprise, has certain features disabled (for security purposes) and certain features limited so that users can buy in to "premium" packages. Specifically:
- You cannot upload or install custom themes (custom code could damage the multi-site environment
- You cannot upload or install custom plug-ins (for the same reasons as above)
- You must pay extra to direct traffic from your own domain to your WordPress.com site (a self-hosted site can use any domain you want)
- You cannon have an ad-free website on WordPress.com without paying extra (ad revenue supports the site)
Some bonus features you get from WordPress.com
- You'll always be running the latest version of the software without the need to update
- Your site will be automatically backed up by WordPress.com's servers
- You can pay extra to use VideoPress for hosting your own videos (doing this yourself requires a separate server in addition to your custom website host)
- Akismet and stats are built-in to the site (though you can add these for free with your own site).