Do I owe taxes, as a foreign investor in US stocks?
This question comes up alot: As a foreign investor, do I have to pay taxes when I buy US stocks? If so, how much? And am I supposed to file taxes with the IRS?
Disclaimer: This is not tax advice. I'm not a tax counsel, and I'm definitely not your tax counsel. If your tax situation is complex, seek help from a licensed tax professional.
One of the biggest hurdles I had to overcome before starting my investing journey was my primal fear of inadvertently breaching tax law. I had nightmares of the 'tax police' coming after me, locking me up in a prison just as I'm about to enter the US, because I forgot to pay taxes on a stock purchase I'd made in 2009.
It's really difficult finding resources for foreign investors (non-US citizens/residents) related to the tax exposure from investing in US stocks. In this post, I cover the most important things you should know as a foreign investor in US stocks, and references for you to read more on.
Types of Tax
As with all investments, international investors in the US stock market are subject to taxes on any capital gains or dividends they receive.
Capital Gains Tax
Capital gains tax is a tax on the profit that an investor realizes when they sell an investment for more than they paid for it. In the US, capital gains tax is typically calculated as the difference between the sale price and the purchase price, multiplied by the investor's tax rate.
Basically, whenever most investors make a profit, the government takes a bite off of it.
You get one huge advantage as a foreign investor in US stocks: you don't pay capital gains tax to the US authorities.[^1] It doesn't matter if you're holding US stocks, or stocks of international companies listed in the US.
This is absolutely amazing — because the vast majority of gains that investors realize from stock investments are due to changes in the stock price (and not from dividends, discussed below).
If you buy $TSLA for $600, then sell it for $700 a few days later — you can withdraw the full $700 straight to your international bank account (net trading fees). No tax liability, zilch, nada.
Dividend tax, on the other hand, is a tax on the dividends that an investor receives from a company. Dividends are profit distributions made by companies to shareholders. Not all companies pay dividends. In fact, 'growth' companies are well known for not paying dividends at all (since they just re-invest any profits straight back into the business). Amazon is a prime example (get it, Prime?).
Corny wordplay aside, it's important to note that foreign investors are liable for taxes on dividends earned from US stocks, as well as any international stocks they earn. In the US, dividends are taxed at the investor's ordinary income tax rate, which can be as high as 37% for some taxpayers.
These taxes are withheld by your investment broker, so you wouldn't need to file a separate US tax return (since you don't 'owe' the IRS anything; they're paid directly by your broker).
The taxes on dividends paid out by US stocks are 30%, assuming your country of residency doesn't have a tax treaty with the US to prevent double-taxation[^2].
So if Apple decides to pay out a $100 dividend, your broker will withhold $30 (the 30% tax on this dividend payment) and add $70 to your USD balance.
An estate refers to of all the investments, assets, and interests an individual owns. Estate tax is a tax on the transfer of a deceased person's property and assets. In the US, the federal government imposes an estate tax on the estates of deceased individuals who have a net worth above a certain threshold, which is currently $11.7 million for individuals and $23.4 million for married couples.
Foreign investors in US stocks may be subject to estate tax on their US assets, including their investments in US stocks, if they meet the threshold for estate tax liability (i.e. if you're loaded). The specific tax implications of estate tax will depend on the individual's country of residence and any applicable tax treaties between the US and that country. It is recommended that foreign investors in US stocks consult with a tax professional who is familiar with both the US and their country's tax laws to determine their potential estate tax liability.
It is also worth noting that estate tax is separate from the taxes on capital gains and dividends that foreign investors in US stocks are subject to. Capital gains and dividends are taxed during the investor's lifetime, while estate tax is imposed on the transfer of assets after the investor's death.
How ETFs Are Treated
You may be wondering how ETFs are treated from a tax perspective, since they represent a basket of stocks, which may include both US and non-US equities.
The answer is simple: the dividend and estate taxes on ETFs are assessed based on where the ETF is registered (or 'domiciled').
If you're a foreign investor in a country that has no tax treaty with the US (e.g. Saudi Arabia), and invest in a US-domiciled ETF — your tax rate is the flat 30%. However, if you choose to invest in the halal ETF "ISDU" to get exposure to US based halal stocks, you can take advantage of the fact that it's domiciled in Ireland. The effective tax rate becomes just 15%, the tax treaty rate between Ireland and the US.
This creates an incentive for foreign investors to choose ETFs domiciled in Ireland, over the ones registered in the US (like
HLAL). You can learn more about Halal ETFs in this detailed post.
In summary, foreign investors ('non-resident aliens' in IRS tax speak) are not liable for capital gains tax, but are subject to dividend and estate taxes. Dividends are withheld by the broker before distributions are made to the investor.
Here are some references if you're interested in reading more on the topic:
- Investopedia: Do Non-U.S. Citizens Pay Taxes on Money Earned Through a U.S. Internet Broker?
- IRS - U.S. Tax Guide for Aliens (Official admission by the US government that aliens do, in fact, exist). Of particular interest is Section 4 - How Income of Aliens Is Taxed.
[^1]: Nonresident aliens are subject to no U.S. capital gains tax, and no money will be withheld by the brokerage firm. https://www.irs.gov/pub/irs-pdf/p519.pdf
[^2]: For a list of all countries that have a tax treaty with the US to prevent double taxation, reference the IRS page here. For other countries (beside the US), you can find the correpsponding dividend tax rate here.
[^3]: Read more on estate taxes for non-resident aliens here: https://onlinetaxman.com/foreign-investment-in-us-tax/