Some non-U.S. citizens living abroad must pay taxes on money earned through a U.S. Internet broker but it depends on a few factors. The tax implications for a foreign investor will depend on whether they're classified by the U.S. government as a resident alien or nonresident alien. They must meet several guidelines to be considered a nonresident alien.
The tax rates can vary depending on the type of investment a nonresident alien holds. Investments in the U.S. aren't subject to capital gains taxes but they'll be taxed in your home country.
Certain nonresident aliens who are in the U.S. for more than 183 days during the tax year are subject to a 30% capital gains tax, however, assuming that their tax home has shifted to the U.S. They include nonresident alien students, scholars, and employees of foreign governments and international organizations. 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
- Tax implications for foreign investors depend on whether they're classified as resident aliens or nonresident aliens by the U.S. government.
- Nonresident aliens aren't subject to U.S. capital gains tax but capital gains taxes will likely be assessed in their countries 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.
- Resident aliens who hold a green card or satisfy resident rules are subject to the same tax rules as U.S. citizens.
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 can't have had a green card at any time during the relevant tax reporting period. They also can't 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.
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 last three years are classified as resident aliens for tax purposes. They're subject to different guidelines than nonresident aliens.
If You're a Nonresident Alien
You're subject to the following tax guidelines 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 that are held with a U.S. dollar-denominated brokerage firm or other agents.
Capital Gains
Nonresident aliens aren't subject to U.S. capital gains tax and no money will be withheld by the brokerage firm. This doesn't mean that you can trade tax-free, however. You'll likely have to pay capital gains tax in your country of origin.
Certain nonresident aliens are subject to a 30% capital gains tax if they're in the U.S. for more than 183 days but only if their tax home has also shifted to the U.S. This includes nonresident alien students, scholars, and employees of foreign governments and international organizations.
Dividends
Nonresident aliens are subject to a dividend tax rate of 30% on dividends paid out by U.S. companies. They're excluded from this tax, however, if the dividends are paid by foreign companies or are interest-related dividends or short-term capital gain dividends.
The 30% tax rate can be lower depending on the treaty between your home country and the U.S. so it's important to contact your brokerage firm to verify the rate.
Normal long-term capital gains tax rates are 0%, 15%, 20%, or 28% depending on taxable income and the nature of the asset.
If You're a Resident Alien
You're subject to the same tax rules as a U.S. citizen if you're a resident alien and hold a green card or satisfy the 183-day residency rule.
The long-term capital gains tax is applied to the profitsfrom the sale of investments that have been held and owned for longer than one year. The tax rates in 2024 are 0%, 15%, or 20%, depending on your tax bracket. It can increase to 28% for some assets.
Investments that have been owned for one year or less are subject to the short-term capital gains tax. This 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. A gain was realized in that year. Investments that have appreciated in value but haven't yet been sold aren't 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 that's called the cost basis. Only the net difference between the gains and losses is taxed as a result. This is referred to as net capital gains.
Do Foreigners Pay Taxes on U.S. Investments?
Foreigners who aren't resident or nonresident aliens of the U.S. don't pay any taxes on their investments to the U.S. government. They will most likely have to pay taxes on their investment earnings to their home country, however.
Do Nonresident Aliens Have to File U.S. Tax Returns?
Nonresident aliens only have to file U.S. Tax Return Form 1040-NR, the U.S. Nonresident Alien Income Tax Return, if they have income that's subject to tax. This can include 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. You must report certain foreign financial accounts to the IRS every year, including bank accounts. You must file a Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114 to report this.
The Bottom Line
Ensuring that you pay your taxes correctly is critical in maintaining a healthy credit profile and tax history. But knowing what taxes you have to pay can be complicated depending on your resident status and your investments.
You generally won't have to pay U.S. capital gains tax on your investment earnings if you're a nonresident alien. You'll usually be subject to the same capital gains tax as U.S. citizens if you're a resident alien.
Please consult a tax professional before selling any investment because your tax situation might be different than what's outlined here.
