Do non-U.S. citizens living abroad pay taxes on money earned through a U.S. Internet broker? It depends. The tax implications for a foreign investor will depend on whether that person is classified as a resident alien or nonresident alien by the U.S. government. A person must meet several guidelines to be considered a nonresident alien.
The tax rates can vary depending on the type of investment for nonresident aliens. For example, investments in the U.S. are not subject to capital gains taxes, but they will be taxed in your home country.
However, certain nonresident aliens—nonresident alien students, scholars, and employees of foreign governments and international organizations—who are in the U.S. for more than 183 days during the taxable year are subject to a 30% capital gains tax—assuming that their tax home has shifted to the U.S.
On the other hand, dividend income is subject to taxes if the income is from a U.S. company. Resident aliens are typically subject to the same tax laws as U.S. citizens.
Key Takeaways
- The tax implications for foreign investors depend on whether they're classified as resident aliens or nonresident aliens by the U.S. government.
- Nonresident aliens are subject to no U.S. capital gains tax, but capital gains taxes will likely be paid in their country of origin.
- Certain nonresident aliens who are in the U.S. for more than 183 days will be subject to capital gains taxes.
- Nonresident aliens are subject to a dividend tax rate of 30% on dividends paid out by U.S. companies.
- If you are a resident alien and hold a green card—or satisfy resident rules—you are subject to the same tax rules as a U.S. citizen.
Understanding Nonresident vs. Resident Alien Status
Non–U.S. citizens are typically classified as nonresident aliens if they haven't passed the green card or substantial presence tests. Examples of nonresident aliens include students, teachers, and those seeking medical treatment in the U.S.
Nonresident aliens cannot have had a green card at any time during the relevant tax reporting period. Also, they cannot have resided in the U.S. for at least 31 days in the current year and a combined total of 183 equivalent days during the current year and the prior two years.
Conversely, non–U.S. citizens who hold green cards and have been in the U.S. for at least 31 days during the current year—and more than 183 days in the past three years—are classified as resident aliens for tax purposes and are subject to different guidelines than nonresident aliens.
If You're a Nonresident Alien
If you fall under the nonresident alien category and the only business you have in the U.S. is investments–such as stocks, mutual funds, and commodities–held with a U.S. dollar-denominated brokerage firm or other agents, you are subject to the following tax guidelines.
Capital Gains
Nonresident aliens are subject to no U.S. capital gains tax, and no money will be withheld by the brokerage firm; however, this does not mean that you can trade tax-free. You will likely need to pay capital gains tax in your country of origin.
Note that certain nonresident aliens—including nonresident alien students, scholars, and employees of foreign governments and international organizations—are subject to a 30% capital gains tax if they are in the U.S. for more than 183 days, but only if their tax home has also shifted to the U.S.
Dividends
Nonresident aliens are subject to a dividend tax rate of 30% on dividends paid out by U.S. companies. However, they are excluded from this tax if the dividends are paid by foreign companies or are interest-related dividends or short-term capital gain dividends.
The 30% tax rate can also be lower depending on the treaty between your home country and the U.S. As a result, it's important to contact your brokerage firm to verify the rate.
Normal capital gains tax rates are 0%, 15%, 20%, or 28%, depending on the scenario.
If You're a Resident Alien
If you are a resident alien and hold a green card—or satisfy the resident rules (183 days)—you are subject to the same tax rules as a U.S. citizen.
In other words, the long-term capital gains tax is applied to the profitsfrom the sale of investments that have been owned for longer than one year. The current tax rates are 0%, 15%, or 20%, depending on your individual tax bracket.
Investments that have been owned for less than one year are subject to short-term capital gains taxes, which is the same tax rate as your ordinary income tax rate. The amount of tax will depend on your total annual income and the resulting marginal tax bracket.
The capital gains tax only applies to investments that have been sold within the tax year, meaning a gain was realized. Investments that have appreciated in value but have not been sold are not subject to taxes.
It's important to note that capital gains can be reduced by subtracting realized investment losses–calledcapital losses. A loss occurs when a taxable investment is sold for less than the initial purchase price–called the cost basis. As a result, only the net difference between the gains and losses is taxed, which is called net capital gains.
Please consult a tax professional before selling any investment since your individual tax treatment might be different than what is outlined above.
Do Foreigners Pay Taxes on U.S. Investments?
Foreigners who are not resident or nonresident aliens of the U.S. do not pay any taxes on their investments to the U.S. government. They will most likely have to pay taxes on their investment earnings in their home country.
Do Nonresident Aliens Have to File U.S. Tax Returns?
Nonresident aliens only have to file U.S. tax returns (Form 1040-NR, U.S. Nonresident Alien Income Tax Return) if they have income that is subject to tax, such as wages, tips, dividends, grants, and any other sources that qualify.
Can the IRS Look at Foreign Bank Accounts?
Yes, the IRS can look at foreign bank accounts. Every year, you must report to the IRS certain foreign financial accounts, such as bank accounts. To report this, you must file a Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114.
The Bottom Line
Ensuring you pay your taxes correctly is critical in maintaining a healthy credit profile and tax history. Depending on your resident status and your investments, knowing what taxes you have to pay can be complicated.
If you are a nonresident alien, generally you will not have to pay U.S. capital gains tax on your investment earnings. If you are a resident alien, generally, you will be subject to the same capital gains tax as U.S. citizens. Consult with a tax advisor for any assistance you may need.
