compoundup
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You can day-trade from UK in the US markets and only account for tax in the UK thanks to a Tax Treaty but...
...is it necessary to obtain a tax reference from the US Internal Revenue Service?
It seems that Interactive Brokers will accept a "W8" form (usually W8-BEN in the case of day-traders) without the reference to a US tax identity (TIN or ITIN) entered on it.
My research tends to suggest that strictly speaking a reference should be obtained, notwithstanding the policy of Interactive Brokers and I show how I have arrived at that conclusion as follows:-
IB as part of their account opening process require the completion of a "W8". The IRS seek to withhold 30% tax on income and gains from aliens seeking to repatriate money unless exemptions have been arranged. IB have set themselves up as a "Withholding Agent" so that their customers outside the US can claim exemption and repatriate trading gains in full, (income is treated differently). See http://www.irs.gov/formspubs/page/0,,id=10754,00.html. IB are not required to forward the W8 forms to the IRS but to use the information on them to complete form 1042-S and make returns to the IRS accordingly.
IB provide a W8 for on-line completion linked from their account management site. On reading the instructions that the IRS have published to help with filling out the form http://www.irs.gov/pub/irs-pdf/iw8ben.pdf It states (first page near bottom left) that "...types of income that are not subject to withholding...includes...Broker proceeds..."
On page 4 of the instructions where specific instructions are being listed as to how to fill in the form - particularly "line 6" it states "...you must get an individual taxpayer identification number (ITIN). To apply for an ITIN, file form W-7 with the IRS..."
IRS publication 515 "Withholding of Tax on Nonresident Aliens and Foreign Entities" http://www.irs.gov/pub/irs-pdf/p515.pdf under US Taxpayer Identification Numbers on page 24 requires withholding agents to "...include the payee's TIN on forms, statements and other tax documents..." (and goes on to cover the question of a ITIN as an alternative) "...if the beneficial owner is claiming...Tax treaty benefits..." (This is what a daytrader is expecting to do.)
IRS publication 1679 (Rev.8-2003) http://www.irs.gov/pub/irs-pdf/p1679.pdf states on page 6 - FAQ 9:"What should I do if a payee refuses or neglects to provide a TIN?" Answer: "Begin backup withholding immediately on any reportable payments..." Note that in FAQ 1 on page 4 "broker proceeds" are mentioned among the payments that may be subject to backup withholding.
The form W-7 can be found at http://www.irs.gov/pub/irs-fill/fw7.pdf and the instructions are appended to the form.
There are ways of submitting and verifying documents through agents who are acceptable to the IRS, particularly US certified notaries and the US Embassy in London but the most straightforward way is probably to send the W-7 with your passport direct to the IRS office in Philadelphia, whose address is in the instructions, by a suitably secured means. The process should not take more than 30 days (according to the instructions).
Most people might be naturally reluctant to expose themselves to the possibility that the IRS would try to get their hooks in once they have issued a tax reference. In the light of the foregoing I view that as a step that must be taken to trade the American markets. The possibility of sudden imposition of withholding tax - possibly with penalties for past non-compliance - and the time required to overcome such an imposition while getting a W-7 through the system don't bear thinking about.
Edward
...is it necessary to obtain a tax reference from the US Internal Revenue Service?
It seems that Interactive Brokers will accept a "W8" form (usually W8-BEN in the case of day-traders) without the reference to a US tax identity (TIN or ITIN) entered on it.
My research tends to suggest that strictly speaking a reference should be obtained, notwithstanding the policy of Interactive Brokers and I show how I have arrived at that conclusion as follows:-
IB as part of their account opening process require the completion of a "W8". The IRS seek to withhold 30% tax on income and gains from aliens seeking to repatriate money unless exemptions have been arranged. IB have set themselves up as a "Withholding Agent" so that their customers outside the US can claim exemption and repatriate trading gains in full, (income is treated differently). See http://www.irs.gov/formspubs/page/0,,id=10754,00.html. IB are not required to forward the W8 forms to the IRS but to use the information on them to complete form 1042-S and make returns to the IRS accordingly.
IB provide a W8 for on-line completion linked from their account management site. On reading the instructions that the IRS have published to help with filling out the form http://www.irs.gov/pub/irs-pdf/iw8ben.pdf It states (first page near bottom left) that "...types of income that are not subject to withholding...includes...Broker proceeds..."
On page 4 of the instructions where specific instructions are being listed as to how to fill in the form - particularly "line 6" it states "...you must get an individual taxpayer identification number (ITIN). To apply for an ITIN, file form W-7 with the IRS..."
IRS publication 515 "Withholding of Tax on Nonresident Aliens and Foreign Entities" http://www.irs.gov/pub/irs-pdf/p515.pdf under US Taxpayer Identification Numbers on page 24 requires withholding agents to "...include the payee's TIN on forms, statements and other tax documents..." (and goes on to cover the question of a ITIN as an alternative) "...if the beneficial owner is claiming...Tax treaty benefits..." (This is what a daytrader is expecting to do.)
IRS publication 1679 (Rev.8-2003) http://www.irs.gov/pub/irs-pdf/p1679.pdf states on page 6 - FAQ 9:"What should I do if a payee refuses or neglects to provide a TIN?" Answer: "Begin backup withholding immediately on any reportable payments..." Note that in FAQ 1 on page 4 "broker proceeds" are mentioned among the payments that may be subject to backup withholding.
The form W-7 can be found at http://www.irs.gov/pub/irs-fill/fw7.pdf and the instructions are appended to the form.
There are ways of submitting and verifying documents through agents who are acceptable to the IRS, particularly US certified notaries and the US Embassy in London but the most straightforward way is probably to send the W-7 with your passport direct to the IRS office in Philadelphia, whose address is in the instructions, by a suitably secured means. The process should not take more than 30 days (according to the instructions).
Most people might be naturally reluctant to expose themselves to the possibility that the IRS would try to get their hooks in once they have issued a tax reference. In the light of the foregoing I view that as a step that must be taken to trade the American markets. The possibility of sudden imposition of withholding tax - possibly with penalties for past non-compliance - and the time required to overcome such an imposition while getting a W-7 through the system don't bear thinking about.
Edward
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