Thank you for the additional information.
The website you mentioned, has stated a general rule, to which there are exceptions. The botXXXXX XXXXXne here, is that even though you are a student, in F-1 status, by treaty, and by domestic law, you fall into the exception based on intending to be, or on actually being physically present in the U.S. for one year or more, with respect to Capital Gains sourced income not associated with a U.S. Trade or Business. (which your capital gains is by definition).
However I found a path for you to avoid backup withholding,and to possibly avoid paying any capital gains tax.
The following discussion connects the interaction of the application of the law at each stage. It starts with the tax treaty stating that as a student, your capital gains are treated for tax purposes as a U.S. Citizen or Permanent resident, and finishes with how to meet requirements to avoid withholding, and provides the conditions under which you are likey to not pay capital gains tax at all. My original answer that says you must report this income on form 1040 NR page 4 still stands.
TAX TREAY: "....the United States will continue to grant these benefits even if they conflict with the Code rules.
Article 8 of the Tax treaty states: "Article 13 provides that, except as provided in Article 8 (Shipping and Air Transport), each Contracting State may tax capital gains in accordance with the provisions of its domestic law.
So the U.S. Code as displayed in publication 901, says for capital gains not included in tax treaty treatment, the withholding rate is 30%.
The Tax treaty states that for student income other than personal services and income associated with a U.S. trade or business, the U.S. will treat it in the same manner as its Citizens and Permanent Residents.
So the botXXXXX XXXXXne is, that Indians who are not students are withheld at 30% and Indians who are students, by tax treaty, are withheld the same as U.S. citizens and permanent residents.
Since the IRS allows, where there is conflict in codes, the more beneficial treatment, this means, that if you were a student who intended to be in the U.S. Less than 1 year, (a school term is normally 9 months or a little less; some colleges have 6 month terms), then you would not be taxed, per the information on the tax site you quoted. That tax site has quoted a general rule, and misapplication of the tax law, which does not take into account the two separate U.S. Tax codes regarding 183 day rules in this situation: (a) 183-day rule of I.R.C. § 871(a)(2) bears no relation to the 183-day rule of the substantial presence test of I.R.C. § 7701(b)(3) and (b) there are situations in which the 183-day rule of I.R.C. § 871(a)(2) may apply to individuals who have not crossed the threshold of U.S. residence under of I.R.C. § 7701(b)(3). .
This means that when you enter the U.S., Your I-94 is stamped D/S or similar notation indicating duration of stay or duration of the program. Most school programs, run longer than a year to graduation. The language is, in the law, that if you stay or intend to stay, 1 year or more, then after 183 days, even if you are a student, you will have to pay capital gains on your investment. If you do not apply for tax treaty benefits, then you will be with held at 30%. If you claim tax treaty benefits by completing form W-8-BEN, you are withheld at the same rate as citizens.
For U.S. citizens, there is backup withholding of 28% on capital gains, if a SSN or ITIN number is XXXXX provided, otherwise back up withholding from capital gains on stock and brokerage accounts are not normally taken. This is because most U.S. Citizens provide a document called a W-9 form indicating that they are not subject to backup withholding.
Non-resident aliens must submit form W-8-BEN to claim the tax benefits, in this case for you to be treated as a citizen in regard to withholding.
You would submit both a W-8-BEN and a Form W-9 in order to avoid back up with holding, because you are claiming tax treaty benefits. Without the two forms, the brokerage agent may withhold 30%. The W-9-BEN allows you to claim treaty benefits, which allow you to be treated as a citizen, and W-9, when you check the box stating that you are not subject to backup withholding, will allow the agent to not withhold taxes.
You will still have to report the sell of these investments on form 1040NR and pay a capital gains tax of 15% if you are in a tax bracket that would normally be higher than 15%;
You may avoid capital gains all together because the tax treaty says that as a student you would be taxed on capital gains according to domestic code, and as a citizen. If you were to be in a tax bracket of income based on adjusted gross income of 15% or less, then there would be no capital gains tax at all. This is because starting this year (2008 and for 2009), the capital gains tax on that income group was eliminated by statute.
So the botXXXXX XXXXXne:
- 1. Complete form 8843, for personal services income not associated with a trade or business; but this will not apply to capital gains because you are in the U.S. longer than one year. However.
- 2. Complete the form W8-BEN together with Form W-9 to avoid back up withholding. This is because by tax treaty, as a student, you are treated as a citizen or permanent resident for capital gains income. The regulation subjects your capital gains to tax when you have been in the U.S. for one year or intend to be in the U.S. for one year or more, after the 183 day rule is met as previously discussed.
Form W8-BEN: http://www.irs.gov/pub/irs-pdf/fw8ben.pdf
Form W9 (be sure to check the box indicating that you are no subject to back up withholding: http://www.irs.gov/pub/irs-pdf/fw9.pdf
Note about form W-9: in the instructions it says if you are a non-resident alien claiming tax treaty benefits to attach a statement. The properly completed form W8-BEN would meet this requirement. However, understand that our laws are complicated, and some brokerage houses (fund managers and administrators, etc) may not be fully aware of how these rules work. They may come back and ask for a third statement, so that you would then have to submit the W8, the W-9 AND make a separate statement. This is not usual. The larger organizations such as PWC, KPMG, Ernst and Young, Fidelity Investments, Charles Schwab, etc will only require the W-8 and W-9, but some smaller independent companies or individual agents may not be fully aware.
- 3. Report the sale/income on form 1040NR (not 1040-NR-EZ)
- 4. If your income is in a certain range of tax brackets of 15% or less, there is no capital gains tax. But as in all things, you must properly file in order to take advantage of all tax benefits.