NRA Capital Gains Tax: When and How to Pay
For non-resident aliens, U.S. capital gains tax is triggered by specific factors. Understand what makes a gain taxable and the necessary reporting procedures.
A non-resident alien (NRA) is an individual who is not a U.S. citizen and does not meet the “green card” or “substantial presence” residency tests. The United States taxes individuals based on this status and the source of their income. A capital gain is the profit from selling a capital asset, like stocks or real estate. For NRAs, capital gains from personal property are not subject to U.S. tax if the individual is in the country for less than 183 days, though there are exceptions.
The 183-Day Physical Presence Rule
One exception to the general rule for taxing NRA capital gains is the 183-day physical presence rule. For a capital gain to be taxable under this rule, the NRA must be physically present in the United States for at least 183 days during the tax year, and the capital gains must be from U.S. sources. Counting the 183 days involves tracking all days the individual is physically present in the U.S. during the calendar year.
Determining whether a capital gain is “U.S. source” can be complex. For personal property like stocks, the source of the gain is determined by the seller’s tax home. Since an NRA’s tax home is outside the U.S., gains from selling stocks and other personal property are often considered foreign-sourced, even if the transaction occurs through a U.S. broker.
For example, if an NRA who does not have a U.S. tax home is present in the U.S. for 190 days and sells stock at a gain, that gain would not be taxable under this rule because it is not considered U.S. source income. However, if that same individual had a U.S. tax home, the gain would be subject to a 30% tax.
Gains from U.S. Real Property Interests
An exception to the rule on taxing NRA capital gains involves the sale of U.S. real property. Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), any gain from the disposition of a U.S. Real Property Interest (USRPI) by a foreign person is subject to U.S. income tax. This rule applies regardless of the number of days the NRA is present in the United States.
A USRPI is defined broadly and includes direct interests in land and buildings located in the U.S. or the U.S. Virgin Islands. This also covers improvements on the land and associated personal property. The definition extends beyond direct ownership to include interests in certain entities, such as shares in a U.S. Real Property Holding Corporation (USRPHC).
A domestic corporation qualifies as a USRPHC if the fair market value of its U.S. real property interests equals or exceeds 50% of the total fair market value of its assets. The look-through provision prevents NRAs from avoiding tax by holding U.S. real estate through a corporate structure. Under FIRPTA, the gain or loss from the sale of a USRPI is automatically treated as “Effectively Connected Income” (ECI).
Gains Connected with a U.S. Trade or Business
Another scenario where an NRA’s capital gains are subject to U.S. tax is when the gains are connected with a U.S. trade or business. If an NRA is engaged in a trade or business within the United States, any income that is “effectively connected” with that business is taxable. This includes capital gains from the sale of assets used in that trade or business.
For income to be considered Effectively Connected Income (ECI), the NRA must be engaged in considerable, continuous, and regular activity in the U.S. The income must be directly associated with the assets used in, or the activities of, that U.S. business.
For instance, if an NRA operates a delivery service in the United States and sells one of the delivery vans for a profit, that capital gain would be considered ECI. This rule is separate from the FIRPTA regulations.
Tax Rates and Reporting Requirements
When a non-resident alien’s capital gain is taxable, specific tax rates and reporting procedures apply. The applicable tax rate depends on the rule that triggers the tax liability. For gains taxable solely due to the 183-day physical presence rule, a flat tax of 30% is imposed on the net U.S. source capital gains and reported on Schedule NEC of Form 1040-NR.
In contrast, gains classified as Effectively Connected Income (ECI), which includes all FIRPTA gains and gains from assets used in a U.S. trade or business, are subject to the same graduated income tax rates that apply to U.S. citizens. The primary document for reporting these taxes is Form 1040-NR, U.S. Nonresident Alien Income Tax Return, where the NRA will report all ECI and calculate the tax due.
A component of FIRPTA is the mandatory withholding requirement to ensure tax collection. The buyer of a U.S. Real Property Interest must withhold a portion of the gross sales price. The standard withholding rate is 15%, but it is reduced to 10% for properties sold for over $300,000 up to $1 million if the buyer intends to use the property as a personal residence. For residences sold for $300,000 or less, the withholding is eliminated.
The buyer, acting as the withholding agent, must report and remit this amount to the IRS using Form 8288 and provide the foreign seller with Form 8288-A as proof of the payment. The withholding is not the final tax; it is a prepayment. If the actual tax owed on the gain is less than the amount withheld, the NRA can file Form 1040-NR to claim a refund. An NRA can also apply for a withholding certificate from the IRS before the sale by filing Form 8288-B to reduce or eliminate the withholding amount.