Swing Trading taxation in the US for non-US residents

[Caronter]

Hi. I am a non-US resident who lives in South America. I recently opened a $25k+ brokerage account in the US. I signed a W-8BEN form, which means that the income generated by my all my trading activity will pay 30% Income Tax. My broker in the US will withhold that 30% income tax, I believe automatically.
Most of my transactions will fall into the category of swing trading, which means that I will hold my investments only for a few days/weeks before selling. In some of the transactions I will have a gain and in some others a loss.
I want to have a better understanding if that 30% income tax is applicable to my trading "NET Income", meaning 30% tax over the net results between my gains and my losses, or is it only applicable to the transactions in which I had a gain? Thanks.

 

[1nvest]

Hi. I am a non-US resident who lives in South America. I recently opened a $25k+ brokerage account in the US. I signed a W-8BEN form, which means that the income generated by my all my trading activity will pay 30% Income Tax. My broker in the US will withhold that 30% income tax, I believe automatically.
Most of my transactions will fall into the category of swing trading, which means that I will hold my investments only for a few days/weeks before selling. In some of the transactions I will have a gain and in some others a loss.
I want to have a better understanding if that 30% income tax is applicable to my trading "NET Income", meaning 30% tax over the net results between my gains and my losses, or is it only applicable to the transactions in which I had a gain? Thanks.

U.S. withholding agent frequently asked questions | Internal Revenue Service

The following questions and answers were prepared in response to inquiries that have been proposed to the IRS by US withholding agents, major corporations and multinational companies outside of the financial service community.

www.irs.gov

it looks like the gross amount according to the above. I use the W-8BEN however for the UK there is no witholding tax applied so i've not experienced it first hand. I just googled it for you

 

[Caronter]

Thanks 1nvest!

Arent any tax deductions? I read somewhere that US citizens can deduct a fraction of their loss amount?
Thanks.

 

[1nvest]

Thanks 1nvest!

Arent any tax deductions? I read somewhere that US citizens can deduct a fraction of their loss amount?
Thanks.

yes in terms of your overall personal tax liability, but for the purposes of withholding tax, its irrelevant it seems

 

[MasterOfCoin]

Thanks 1nvest!

Arent any tax deductions? I read somewhere that US citizens can deduct a fraction of their loss amount?
Thanks.

Uncle Sam will always withhold his cut, of that you can be sure !

Unless a Bilatreral Tax Treaty has been agreed:

Withholding Tax doesn't apply to US Citizens, only to Nonresident Aliens.
- So you will have Tax withheld on the Gross Amount, where a trade makes a profit.
This is withheld automatically at time of trade and collected on settlement.
There is no automatic mechanism to set losing trades off against winning ones.

Different rules apply to US Citizens, where ever they may reside.

As you don't indicate which jurisdiction in South America you reside in, we can't inform you regarding treaty rates.

However, the in the above indicated example, the rate quoted is not entirely correct !
The bilateral Tax Treaty with the UK indicates that a 15% rate is applied to most Dividends paid by US corporations to UK Citizens. Capital Gains, however, are Not Taxable, as long as the Individual does not spend more than 183 days in the US during that year. Thus No Tax is generally applicable to the profits resulting from swing trading.

What applies in your country of residence will depend on any Treaty in place.

 

[Caronter]

Uncle Sam will always withhold his cut, of that you can be sure !

Unless a Bilatreral Tax Treaty has been agreed:

Withholding Tax doesn't apply to US Citizens, only to Nonresident Aliens.
- So you will have Tax withheld on the Gross Amount, where a trade makes a profit.
This is withheld automatically at time of trade and collected on settlement.
There is no automatic mechanism to set losing trades off against winning ones.

Different rules apply to US Citizens, where ever they may reside.

As you don't indicate which jurisdiction in South America you reside in, we can't inform you regarding treaty rates.

However, the in the above indicated example, the rate quoted is not entirely correct !
The bilateral Tax Treaty with the UK indicates that a 15% rate is applied to most Dividends paid by US corporations to UK Citizens. Capital Gains, however, are Not Taxable, as long as the Individual does not spend more than 183 days in the US during that year. Thus No Tax is generally applicable to the profits resulting from swing trading.

What applies in your country of residence will depend on any Treaty in place.

Thanks MasterOfCoin.

I live in Chile. I don't think we have a Billateral Tax Treaty with the US?

 

[MasterOfCoin]

Thanks MasterOfCoin.

I live in Chile. I don't think we have a Billateral Tax Treaty with the US?

Just to confirm...
You are correct in thinking this; Chile does not have a Tax Treaty with the US.

Glad to be of help.

 

[new_trader]

Hi. I am a non-US resident who lives in South America. I recently opened a $25k+ brokerage account in the US. I signed a W-8BEN form, which means that the income generated by my all my trading activity will pay 30% Income Tax. My broker in the US will withhold that 30% income tax, I believe automatically.

I don't think this is correct. The US will only withhold 30% if you do not submit a W-8BEN form. You need this form to declare that you are NOT a US citizen or US resident and therefore not liable to any form of US taxation. If you don't submit this form, the agent is required to withhold 30% of your income.

 

[MasterOfCoin]

I don't think this is correct. The US will only withhold 30% if you do not submit a W-8BEN form.

Not so simple as that.
The OP is correct.

True, Uncle Sam will grab 30% if you don't submit the form.
If you do submit the form, Uncle Sam will deduct up to 30% anyway, depending on whether a Tax Treaty exists between the US and your Nation that agrees a lesser sum. No agreement and you'll be clobbered for the whole 30%.

It was I believe a US Citizen that said ''There are two certainties in life: Death and Taxes.''

 

[new_trader]

Not so simple as that.
The OP is correct.

True, Uncle Sam will grab 30% if you don't submit the form.
If you do submit the form, Uncle Sam will deduct up to 30% anyway, depending on whether a Tax Treaty exists between the US and your Nation that agrees a lesser sum. No agreement and you'll be clobbered for the whole 30%.

It was I believe a US Citizen that said ''There are two certainties in life: Death and Taxes.''

I don't think this is correct either. The reason for having Tax Treaties is to avoid Double Taxation, it's not to rob Foreign Investors of 30% of their income.

The quote below is straight from the IRS website: It doesn't mention anything about 30%, it merely says that if there is no treaty the income will be subject to income tax under a normal US tax return. The important thing to note is: "income they receive from sources within the United States."

The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Most income tax treaties contain what is known as a "saving clause" which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.

If the treaty does not cover a particular kind of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for the applicable U.S. tax return.

 

[MasterOfCoin]

I don't think this is correct either. The reason for having Tax Treaties is to avoid Double Taxation,

Like I said, it's not that simple, which is why there is a hoard of 'Tax Advisors' making a living out of it

But for small time retail investors the default situation usually applies, and , to be fair, in common with most other Tax Authorities, this is to withhold Tax at the default rates where agreed exemption rates have not been established.

Filling in and submitting a W-8BEN doesn't exempt an alien from US Tax, it merely provides the basis on which reduced rate of withholding Tax, according to agreed Treaties, the broker should withhold and pay to the IRS.

Importantly, this does not prevent Double Taxation. Uncle Sam takes a cut. It's up to the individual to then claim Tax Relief in their own Country for Tax already paid in the US. Moreover, as a non-US Citizen, you can't claim this back from the US. So, even if you are not liable for any Tax in your home Country, you can't ever get that back.

Of course, there are special rules to allow the filthy rich foreigners to invest in the US and not be subject to it's Taxes, but I very much doubt anyone needing to come to T2W for Tax guidance is in that bracket.

None of this will effect most readers, since, as already stated previously, there is no Tax on the profits of trading shares in the US, so unless you are holding shares to derive an income from them, you won't have any Tax deducted anyway.

😁