A:

The tax implications for a foreign investor will depend on whether that person is classified as a resident alien or a non-resident alien. To be considered a non-resident alien, a person must meet several guidelines. First of all, the person cannot have had a green card at any time during the relevant tax reporting period (e.g 2005) and cannot have resided in the U.S. for more than 183 days in the past three years, including the current reporting period. However, non-U.S. citizens who hold green cards and have been in the U.S. for more than 183 days are classified as resident aliens for tax purposes and are subject to different guidelines than non-resident aliens.

If you fall under the non-resident alien category and the only business you have in the U.S. is in investments (stocks, mutual funds, commodities) within a U.S. dollar-denominated brokerage firm or other agent, you are subject to the following tax guidelines. In terms of capital gains, non-resident aliens are subject to no U.S. capital gains tax, and no money will be withheld by the brokerage firm. This does not mean, however, that you can trade tax free - you will likely need to pay capital gains tax in your country of origin. In terms of dividends, non-resident aliens face 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. This 30% rate can also be lower depending on the treaty between your home country and the U.S., so it is important that you contact your brokerage firm to verify the rate. 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 any U.S. citizen.

For more information, see IRS Publication 519: U.S. Tax Guide For Aliens.

RELATED FAQS
  1. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (unless exempt), including what's earned outside the U.S., is usually ... Read Answer >>
  2. What is an alienation clause?

    Whether used in reference to insurance policies, mortgages or commercial loans, an alienation clause stipulates that should ... Read Answer >>
Related Articles
  1. Taxes

    What is a Resident Alien?

    A resident alien is a foreigner who is a permanent resident of the country in which he or she resides but does not have citizenship.
  2. Retirement

    How Are 401(k) Withdrawals Taxed for Nonresidents?

    As a U.S. nonresident, deciding what to do with your 401(k) after you return home comes down to which tax penalties, if any, you're willing to incur.
  3. Taxes

    How To Pay Taxes If You're Overseas

    Here is a step by step guide to paying taxes if you are a U.S. citizen living overseas.
  4. Taxes

    Understanding Taxation Of Foreign Investments

    Technically, any gains from foreign investments owned by an American citizen are subject to tax by the company's home country as well as the IRS. However, the Foreign Tax Credit enables you to ...
  5. Taxes

    Tax-Efficient Strategies For International Clients

    In a globalized world, international clients seek to diversify holdings by accessing U.S. markets. Creative strategies will help optimize tax positioning.
  6. Financial Advisor

    How to Advise Non-U.S. Citizens on Social Security

    Advising clients who are not U.S. citizens on Social Security is complex. Here is how you can successfully navigate this challenge.
  7. Taxes

    Comparing Long-Term vs. Short-Term Capital Gain Tax Rates

    Learn about the difference between short- and long-term capital gains and how the duration of your investment can impact your tax liability.
  8. Taxes

    3 Tax Implications of Dividend Stocks

    Dividend paying companies are attractive in a low interest rate environment, but income seeking investors have to be careful of the potential tax hit.
  9. Financial Advisor

    How to Plan for Taxes on Dividends

    Dividends are taxed differently than other investment income. Here are some strategies to help lower taxes on dividends.
  10. Taxes

    3 Ways To Avoid The Dividend Tax Hike

    Find out how you can offset the potential tax hikes.
RELATED TERMS
  1. Nonresident Alien

    A non-U.S. citizen who doesn't pass the green card test or the ...
  2. IRS Publication 519 - U.S. Tax Guide For Aliens

    A document published by the Internal Revenue Service (IRS) that ...
  3. IRS Publication 513

    A document published by the Internal Revenue Service that details ...
  4. Resident Alien

    A foreigner who is a permanent resident of the country in which ...
  5. Dual-Status Taxpayer

    A taxpayer that has met the criteria to be both a resident and ...
  6. IRS Publication 54

    A document published by the Internal Revenue Service that outlines ...
Hot Definitions
  1. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  2. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  3. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  4. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  5. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center