Trading in stocks as an NRA

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Topic Author
UYScuti
Posts: 3
Joined: Tue Sep 21, 2021 1:16 am

Trading in stocks as an NRA

Post by UYScuti »

I'm seeking confirmation if my understanding is correct with regards to nonresident aliens trading with a US based online broker.

From this IRS document (https://www.irs.gov/publications/p519#e ... 1000222317):
Publication 519 U.S. Tax Guide for Aliens - Chapter 4 How Income of Aliens is Taxed - Nonresident Aliens - Trading in stocks, securities, and commodities.
"If your only U.S. business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U.S. resident broker or other agent, you are not engaged in a trade or business in the United States."

Disregarding stock dividends in this scenario, does this mean I can trade stocks with my Fidelity account and I do not have to report any capital gains and I do not have to file a 1040NR. Is that correct? Or am I missing something?

Some background on myself, I used to work in the US from 2012 to 2015 on an H1B and I closed my 401k with Fidelity but kept my brokerage account open when I left. I do not pass the green card test nor the substantial presence test so I am by definition a nonresident alien. I was thinking of trading stocks with this account which prompted me to read up on tax matters. I'm trying to think how will the IRS know that I am a nonresident alien and that I do not need to pay taxes on my gains. I will pay taxes in my home country definitely but will the IRS raise any issue if I just start trading and not file a 1040?
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galeno
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Joined: Fri Dec 21, 2007 11:06 am

Re: Trading in stocks as an NRA

Post by galeno »

Waiting for Ted Swippet.

I'm a non-USA investor but I've been on these boards since forever. My understanding..

Anyone who is a USA citizen or legal resident residing ANYWHERE is a USA person and is subject to USA taxes and bureaucracy.

Any illegal foreigner residing in the USA is considered by the USA tax authorities to be a USA person also.
KISS & STC.
TedSwippet
Posts: 5166
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Trading in stocks as an NRA

Post by TedSwippet »

Welcome.
UYScuti wrote: Tue Sep 21, 2021 1:56 am Disregarding stock dividends in this scenario, does this mean I can trade stocks with my Fidelity account and I do not have to report any capital gains and I do not have to file a 1040NR. Is that correct? Or am I missing something?
Assuming you are a non-resident alien, that's correct as far as it goes. Assuming you have sent Fidelity a W-8BEN form first (see below), you have no capital gains or other tax filing requirement with the IRS.

Depending on where you live, you may however face a 30% flat US tax on the dividends paid by whatever US stocks you hold. You may also face the risk of 26-40% US estate tax on your entire holding above $60,000. Full details in the wiki:

- Non-US investor's guide to navigating US tax traps - Bogleheads
- Nonresident alien taxation - Bogleheads
UYScuti wrote: Tue Sep 21, 2021 1:56 am I'm trying to think how will the IRS know that I am a nonresident alien and that I do not need to pay taxes on my gains. I will pay taxes in my home country definitely but will the IRS raise any issue if I just start trading and not file a 1040?
As a US non-resident alien, you should have already filed a form W-8BEN with Fidelity. This overrides the W-9 you would have filled in when you opened the account as a US resident, and it is the W-8BEN that tells the broker that you are a non-resident alien. Once they have this form, they will then report dividends and other account activity to the IRS and to you using a 1042-S, rather than the more normal 1099 used for US investors. This is how the IRS sees that you are no longer a US based investor. The IRS may (or may not; the US's FATCA "reciprocity" might be described at best as perfunctory) send this 1042-S to your home country's tax authorities.

Now, some caveats. Firstly, note above the 30% US tax on dividends (potentially reduced by treaty), and also the risk of loss of up to 40% of your US holdings to US estate tax if your home country does not have a US estate tax treaty. Secondly, Fidelity have a reputation for restricting, and perhaps even forcibly closing, the accounts of some customers who leave the US; it's difficult to say exactly what they will do, since it seems to vary by country. If you still want to trade US stocks, even knowing of the US tax risks and drawbacks for sizeable accounts, you would probably be better off using a local or international brokerage, rather than trying to leverage an old Fidelity account from time spent working in the US.

If you can say which country you live in, that will help solidify the vagueness above regarding your US tax rate on dividends and your potential exposure to confiscatory US estate taxes. Also, whether you plan to trade individual US company stocks or US domiciled ETFs. Note that no matter which broker you use, or where that broker is located, you still have the US estate tax risk and dividend tax drag outlined above.
Topic Author
UYScuti
Posts: 3
Joined: Tue Sep 21, 2021 1:16 am

Re: Trading in stocks as an NRA

Post by UYScuti »

Thank you for the detailed response TedSwippet.
TedSwippet wrote: Wed Sep 22, 2021 5:21 pm Now, some caveats. Firstly, note above the 30% US tax on dividends (potentially reduced by treaty), and also the risk of loss of up to 40% of your US holdings to US estate tax if your home country does not have a US estate tax treaty.
Thanks for mentioning the estate tax but I probably will sell and move the proceeds back home long before the time comes.
TedSwippet wrote: Wed Sep 22, 2021 5:21 pm Secondly, Fidelity have a reputation for restricting, and perhaps even forcibly closing, the accounts of some customers who leave the US;
I've seen this discussed in the forum that's why I held back from sending in my W-8BEN. Do you know if there will be issues if I file my W-8BEN now after the fact that I have already purchased stocks? I'm hoping that I get to decide when to exit my positions rather than have Fidelity force me to close down my account if they find out that I no longer reside in the US.

TedSwippet wrote: Wed Sep 22, 2021 5:21 pm If you can say which country you live in, that will help solidify the vagueness above regarding your US tax rate on dividends and your potential exposure to confiscatory US estate taxes. Also, whether you plan to trade individual US company stocks or US domiciled ETFs. Note that no matter which broker you use, or where that broker is located, you still have the US estate tax risk and dividend tax drag outlined above.
I'm from Australia. I'm currently holding individual US company stocks, no ETF. Thanks again for taking the time to respond to my questions.
TedSwippet
Posts: 5166
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Trading in stocks as an NRA

Post by TedSwippet »

UYScuti wrote: Wed Sep 29, 2021 6:31 am
TedSwippet wrote: Wed Sep 22, 2021 5:21 pm Secondly, Fidelity have a reputation for restricting, and perhaps even forcibly closing, the accounts of some customers who leave the US;
I've seen this discussed in the forum that's why I held back from sending in my W-8BEN. Do you know if there will be issues if I file my W-8BEN now after the fact that I have already purchased stocks? I'm hoping that I get to decide when to exit my positions rather than have Fidelity force me to close down my account if they find out that I no longer reside in the US.
I don't think anyone can tell you what Fidelity might or might not do in this situation (including Fidelity themselves!). From anecdotes here and elsewhere, it seems rather random. And that's for cases where folk have followed the correct process for the W-8BEN, something it seems you've sidestepped, at least for now.

If you don't file a W-8BEN, the broker may assume you remain a US investor, and will report your gains and so on to the IRS as if you still live there. What happens then is hard to predict. The IRS can probably be persuaded that you are non-resident, provided you file enough 1040-NR and 8833 forms, but things will almost certainly be at minimum much messier than if you file the right paperwork with the broker. It is likely that the broker will not withhold the required US tax on dividends, in which case you are supposed to pay them to the IRS yourself.

What annual forms does the broker currently send you? 1099? 1042? Or, have you not held these stocks with them long enough yet to find out?

Also, if you're concerned about a 'forced sale' of your stocks, what prevents you from simply selling them all in Fidelity now, transferring the proceeds to another broker, ideally local, although Interactive Brokers would probably be a decent choice too, and then re-buying the same stocks? That way, you're never at the mercy of any caprice on Fidelity's part. Why are you keen to retain Fidelity US as your brokerage, when it seems that other and simpler options will exist for you?
UYScuti wrote: Wed Sep 29, 2021 6:31 am
TedSwippet wrote: Wed Sep 22, 2021 5:21 pm If you can say which country you live in, that will help solidify the vagueness above regarding your US tax rate on dividends and your potential exposure to confiscatory US estate taxes. Also, whether you plan to trade individual US company stocks or US domiciled ETFs. Note that no matter which broker you use, or where that broker is located, you still have the US estate tax risk and dividend tax drag outlined above.
I'm from Australia. I'm currently holding individual US company stocks, no ETF.
In which case, you should have no particular US tax issues. Australia has a tax treaty with the US that gives a 15% dividend rate (likely reclaimable from Australia as a 'foreign tax credit' or similar, to the extent that your Australian tax on this exceeds 15%), and also a decent US estate tax treaty that ought to cover you, at least up to US$11mm or so.
Topic Author
UYScuti
Posts: 3
Joined: Tue Sep 21, 2021 1:16 am

Re: Trading in stocks as an NRA

Post by UYScuti »

TedSwippet wrote: Wed Sep 29, 2021 10:40 am What annual forms does the broker currently send you? 1099? 1042? Or, have you not held these stocks with them long enough yet to find out?
The last form was a 1099 when I left years ago and since then I had zero balance so no forms were sent out. It's only this year that I started using my brokerage account to invest so I will most likely receive a 1099 unless I submit a W-8BEN.
TedSwippet wrote: Wed Sep 29, 2021 10:40 am Why are you keen to retain Fidelity US as your brokerage, when it seems that other and simpler options will exist for you?
Mainly because it was convenient for me. I keep cash in my US bank account since we holiday there almost every year but since international travel from Australia has been restricted since last year I decided to transfer the money over to my brokerage account and try to earn some profit off it. The tax implications was something I should have considered in hindsight.

I've decided that I'll put in my W-8BEN before the end of the year and see how it goes. If they want to restrict my account or if they decide to close it then I just have to deal with it when it happens.

You've raised really good points and I wanted say thanks again for sharing your thoughts.
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