Tax implications of trading US markets

compoundup

Junior member
25 1
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
 
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Skimbleshanks

1
2,325 16
Good post Compoundup, and welcome to T2W. :D

The only thing I would add, is that when you open an account with IB now, you are in fact opening an account at the UK office of IB, and statements etc all have the UK office details on them. So therefore I would surmise that the IRS would classify these as being outside their jurisdiction, although I may be wrong on this.

However, for anyone opening an account direct with any US broker, then your research above should be invaluable. :D
 

compoundup

Junior member
25 1
A fair point Skimbleshanks but I think that readers should be aware that a direct access broker is actually putting your money into the American (or other) market and taking your profits out. You are therefore de-facto trading in the US and thereby exposed to US Tax considerations.

If you don't want this exposure you can use an operation like Deal4Free where you are trading against them and the money never leaves the UK.

However I don't believe in tax considerations governing decisions about where or how to trade. I want to pay the tax man some money because that means I get to keep some profits :)

Edward
 

compoundup

Junior member
25 1
By way of a postscript the history of my application runs as follows:-

23 Sept - W7 and enclosures sent to IRS Philadelphia
26 Sept - date of confirmed delivery by courier

I telephoned ( +1 215 516 2000) a couple of times in October to be told that they had no record of the application. Then in early November I heard that the application had been logged into the system on 27 October.

12 November - I received my supporting documents back

I rang the same day to find out whether the ITIN number had been issued and was advised to call again around the end of the month.

27 November - the form confirming the issue of the ITIN and its number arrived.

This took about twice as long as the guidance on the notes to the application form.

Edward
 

DaveJB

Experienced member
1,159 42
FWIW,
I've been trading EoD USA for a few years via a US E Trade account (okay, I was young and impressionable...well, the latter at least) and a W8-Ben has covered it so far. My accountant was happy enough filing my CGT, so I'd figure that it's okay.... if I get locked up I'll email from the prison library internet connection to advise of the flaw in this policy.
Dave
 

JonnyT

Senior member
2,560 22
It just means next time you take your Holiday in the good old US of A they will wisk you off to Guantanamo Bay.

JonnyT
 
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Liquid validity

0 0
Thought I'd post on this thread to keep info in one place
for anyone doing a search.
My W-8 is up soon, so thats the reason for posting.

I heard the IRS are bringing in changes to the ITIN structure this year:
http://www.irs.gov/Individuals/ITIN-Policy-Change-Summary-for-2013..
Some major changes including ITIN only valid for 5 years instead of indefinite.
IRS said:
New ITINs will now be issued for a five-year period rather than in indefinite period. This change will help ensure that ITINs are being used for legitimate tax purposes.

As far as a W-8BEN goes, the exemption to marketable securities still applies:
Forms for Foreign Beneficial Owners
IRS said:
Exceptions to TIN Requirement

A foreign person does not have to provide a TIN to claim a reduced rate of withholding under a treaty if the requirements for the following exceptions are met.

Income from marketable securities (discussed next).
Unexpected payments to an individual (discussed under U.S. Taxpayer Identification Number Requirement).

Marketable Securities

A Form W-8BEN provided to claim treaty benefits does not need a U.S. TIN if the foreign beneficial owner is claiming the benefits on income from marketable securities. For this purpose, income from a marketable security consists of the following items:

Dividends and interest from stocks and debt obligations that are actively traded.
Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940(mutual fund).
Dividends, interest, or royalties from units of beneficial interest in a unit Investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933.
Income related to loans of any of the above securities.
Basically no change for non U.S. residents submitting W-8BEN.
Still 3 year expiry at end of 3rd calendar year.
You used to be able to avoid the 3 year re-submission if you
used an ITIN.
With an ITIN expiring every 5 years now, the ITIN route is actually more hassle now.

If you do need an ITIN, U.S. embassy in London is probably easiest route
for any UK clients of U.S. brokers.
Individual Taxpayer Identification Number | Embassy of the United States
ITIN is still not mandatory for W-8BEN, yet...
 
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