US Tax Implications for International Investors

Editorial team of TFX

• 17.09.21 • 5 min read

Practically every form of a transaction has tax ramifications. Transactional tax difficulties arising from purchasing real estate or businesses in the United States while you are residing overseas are one area of the tax code that can become particularly problematic. The tax ramifications of these transactions—which may include investment property tax—must be handled properly by United States expatriates and foreign citizens to avoid any undesirable tax liabilities.

Who is Eligible?

A person living in the United States may be subject to U.S. taxes on their worldwide income and some international assets. Foreign nationals and expats are subject to income tax on U.S. sources of income. A foreign national, also known as a non-resident alien, is not a citizen of the United States and can be a foreign individual, a foreign corporation, a foreign estate, or even a foreign trust. If you own real estate or a business in the United States, you should be aware of various taxes.

A foreign national or expat should be conscious of all tangible and intangible assets in the United States that may be subject to foreign investor tax in the U.S. A foreign national may owe estate taxes on the following property in the United States:

• Ownership or control of real estate in the U.S.
• Stock in a U.S. corporation
• An interest in a U.S. partnership (if the partnership does business in the U.S. or has assets in the U.S.)
• Interest in a U.S. trust
• Holding a debt obligation of a U.S. person

If You are a Non-resident

Suppose a noncitizen is exempt or hasn't satisfied the Green Card or substantial presence standards. In that case, they are often categorized as non-resident aliens. Students, professors, and individuals getting treatment in the United States are examples of non-resident aliens. A green card cannot have been held by a non-resident immigrant at any point during the tax reporting period. In addition, they must have spent at least 183 days in the United States in the previous three years, including the current reporting period.

Non-U.S. citizens with green cards who have spent at least 31 days in the United States this year—and more than 183 days in the previous three years—are categorized as resident aliens for tax purposes and are subject to different rules than non-resident aliens.

Tax for a foreign investor can vary depending on the type of investment for non-resident aliens. For example, U.S. capital gains tax for foreign investors is not levied on assets made in the United States. Still, they will be assessed in your home country. Dividend income, on the other hand, is taxed if it comes from a U.S. corporation. Resident foreigners are usually subject to the same tax laws as citizens of the United States.

Suppose you are a non-resident alien. Your only business in the United States is investing in stocks, mutual funds, or commodities through a U.S. dollar-denominated brokerage firm or other agency. In that case, you are subject to the following tax rules:

1. Capital Gains

Do foreign investors pay capital gain tax? Non-resident aliens are not subject to the United States' capital gains tax. The brokerage business will not withhold any funds. This does not, however, imply that you can trade tax-free. In your home country, you will almost certainly have to pay capital gains tax.

2. Dividends

The dividend tax for foreign investors is 30% on dividends paid out by U.S. companies. Suppose the dividends are paid by foreign corporations, interest-related dividends, or short-term capital gain dividends. In that case, they are exempt from the tax. Depending on the treaty between your home country and the United States, the 30% tax rate may be reduced.

If You are a Resident

If you have a green card or meet the residency requirements (183 days), you are subject to the same tax rules as a U.S. citizen. To put it another way, the long-term capital gains tax is imposed on income from the sale of investments held for more than a year. Depending on your individual tax band, the current tax rates are 0%, 15%, or 20%.

Short-term capital gains taxes apply to investments held for less than a year, and these taxes are the same as your regular income tax rate. The amount of tax you pay is determined by your total annual income and the marginal tax bracket that results. The capital gains tax only applies to investments sold within the tax year and resulted in a profit. Taxes do not apply to assets that have increased in value but have not been sold.

It's worth noting that capital gains can be decreased by deducting realized investment losses, referred to as capital losses. When a taxable investment is sold for less than its initial purchase price, known as the cost basis, a loss arises. As a result, only the difference between the gains and losses, referred to as net capital gains, is taxed.