Do Foreigners Pay Capital Gains Tax on US Stocks?
For non-US investors, tax on US stock gains depends on several factors. Understand how your personal circumstances and investment choices affect your tax liability.
Foreign nationals investing in U.S. stocks often ask if their profits are taxable by the United States. The answer is generally no, but this rule has exceptions that can subject a foreign investor to U.S. capital gains tax. The outcome depends on your U.S. tax residency status and the nature of your investments. The Internal Revenue Service (IRS) framework distinguishes between different types of U.S. income and the status of the person earning it.
Determining Your US Tax Residency Status
For U.S. tax purposes, a “foreigner” is classified as a Nonresident Alien (NRA) based on IRS tests, not citizenship. If you are not a U.S. citizen, your tax status depends on whether you qualify as a “Resident Alien.” Failing these tests makes you an NRA, which changes how your U.S. investment income is treated.
The first standard is the Green Card Test. If you are a lawful permanent resident of the U.S. at any time during the year, you satisfy this test and are taxed on your worldwide income like a U.S. citizen.
A more complex measure is the Substantial Presence Test, based on your physical presence in the U.S. over three years. To meet this test, you must be present for at least 31 days in the current year and a total of 183 days over the three-year period. The 183-day calculation is weighted: all days in the current year, one-third of the days in the prior year, and one-sixth of the days in the second prior year.
For example, presence for 120 days in each of the last three years is calculated as 120 + (1/3 120) + (1/6 120), totaling 180 days. This would not meet the Substantial Presence Test. Individuals who meet neither test are classified as NRAs.
The General Tax Rule and Form W-8 BEN
For Nonresident Aliens (NRAs), capital gains from selling stock in U.S. corporations are generally not subject to U.S. tax. The IRS considers these gains foreign-source income if certain conditions are met. This allows foreign investors to trade U.S. securities without a U.S. tax liability on their profits.
To use this rule, you must certify your foreign status to your U.S. brokerage firm by submitting Form W-8 BEN. This form is the primary tool for an NRA to declare their non-U.S. status and should be completed when opening a brokerage account. It requires your name, country of citizenship, residence address, and a Foreign Tax Identifying Number (FTIN).
By signing, you declare you are not a U.S. person, which instructs the broker not to apply backup withholding on stock sale proceeds. Without a valid Form W-8 BEN, a broker may implement backup withholding up to 24%. The form is valid for the year it is signed and for the next three calendar years.
Key Exceptions to the General Rule
Several exceptions can trigger a U.S. tax obligation for a Nonresident Alien (NRA). These rules apply to income with a stronger connection to the United States.
The 183-Day Rule
If an NRA is physically present in the U.S. for 183 days or more in a tax year, their U.S.-source capital gains become taxable. This rule applies even if the individual does not meet the Substantial Presence Test. The tax is a flat 30% on net gains realized during the U.S. presence.
Effectively Connected Income (ECI)
If a stock investment is “Effectively Connected Income” (ECI) with a U.S. trade or business, the resulting capital gains are taxable. This occurs if an NRA is engaged in a U.S. business and the stock portfolio is used in that business. ECI gains are taxed at the same graduated rates that apply to U.S. citizens.
FIRPTA Rule (U.S. Real Property Holding Corporations)
The Foreign Investment in Real Property Tax Act (FIRPTA) taxes gains from selling stock in a “U.S. Real Property Holding Corporation” (USRPHC). A corporation is a USRPHC if 50% or more of its assets’ value consisted of U.S. real property interests during the last five years. The gain is taxed at regular U.S. income rates, and the buyer withholds 15% of the gross sales price.
Taxation of Stock Dividends
Dividends paid on U.S. stocks are treated differently from capital gains for Nonresident Aliens (NRAs). Unlike the exemption for capital gains, dividends from U.S. corporations are U.S.-source income and subject to a mandatory 30% withholding tax. This tax is withheld by the U.S. broker before the funds are distributed.
The United States has income tax treaties with many countries that can reduce this withholding rate, often to 15% or lower. To benefit from a reduced treaty rate, the NRA must have a valid Form W-8 BEN on file with their broker. On this form, the investor certifies their country of tax residence and claims the applicable treaty benefits.
It is the investor’s responsibility to claim these treaty benefits. Without a correctly completed Form W-8 BEN, the broker must withhold at the default 30% rate.
US Tax Filing Requirements
A Nonresident Alien (NRA) must file a U.S. tax return only if they have income subject to U.S. tax. If an NRA’s only U.S. investment activity results in capital gains that are exempt from U.S. tax, a return is not required. The properly filed Form W-8 BEN with the brokerage firm is sufficient to certify this exempt status.
A filing obligation arises if an NRA’s situation falls into one of the exceptions. For instance, if gains are taxable due to the 183-day rule, are considered Effectively Connected Income (ECI), or are from selling stock in a U.S. Real Property Holding Corporation (USRPHC), a return must be filed.
When a return is required, you must use Form 1040-NR, U.S. Nonresident Alien Income Tax Return. This form is used to report all taxable U.S. income and calculate the final liability. It is also used to reconcile any amounts withheld during the year, such as the tax on dividends or withholding under FIRPTA, to determine if a refund is due.