Risk and Tax Considerations - Foreign Securities and Taxation

When U.S. residents invest in securities issued by foreign governments or companies, returns on those investments can be taxed both in the investment's country and back home by the IRS. Some countries impose a tax on purchases or sales of their domestic securities. Other countries impose a value-added tax (VAT) on the broker's commission rather than on the price of the security. For the most part, however, these taxes have been phased out over the years and are nominal in those few industrialized nations where they still exist.

  • Capital Gains
    • Conventionally, an investor's capital gains are taxed in the country where he or she resides.

  • Dividends
    • As for taxing dividends on foreign stocks, it is a legal patchwork. In some cases, the investor is taxed in her own country; in others, she is taxed by the investment's native country, or she could even be taxed in both.
    • Note that an investor can receive a Federal tax credit for foreign tax paid on their investments.
    • By treaty, the Canadian government cannot tax U.S. residents more than 10% on interest income or 15% on dividends. Under most circumstances, Canada is effectively unable to tax U.S. residents on capital gains.

It is important to remember that these taxes exist, and they are often a barrier to those seeking tax-free or tax-deferred investments. A U.S. resident who is inclined to buy municipal bonds is likely to lose the advantage of those instruments if she purchases the obligations of a municipality in another country.

Wash Sales and Substantially Identical Securities
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