The exclusion for your tax withholding applies to Social Security and Medicare taxes, that you still have to have withheld and pay income taxes on all U.S. Sourced Income. BUT you are allowed to file a Non-Resident Return.
This means that yes, you have to have withheld the flat 30% rate for capital gains unless you complete a form W-8-BEN to claim tax treaty rates. The tax treaty allows you to be taxed at the more favorable rate as U.S. Citizen's or other rate as provided by tax treaty, which ever benefits you most.
Because you have income not associated with YOUR trade or business, you can not report this capital gains on 1040NR-EZ, you have to use form 1040NR. http://www.irs.gov/pub/irs-pdf/f1040nr.pdf
Reference: IRS Publication 901
The publication provides special treaty rates for dividends, capital gains, and other non-wage income is in Table 1 beginning on page 31. These rates relate to income that is not effectively connected with a U.S. trade or business, reported on page 4 of Form 1040NR. Summary information on treaty exempt wages and scholarship payments is in Table 2 beginning on page 34. More detailed information is provided for each country in the first part of Publication 901.
The capital gains tax on capital gains is computed on page four of 1040NR.
Form W-8-BEN: http://www.irs.gov/pub/irs-pdf/fw8ben.pdf
Thank you for your reply. After reading the response below from one of the websites. I'm a bit confused. The question is posted below.
Could you please tell me who is not subject to long-term or short-term capital gains
and who is subject to 30% capital gains.
Did you make a mistake in writing 30% rate for capital gains, shouldn't it be only U.S. Interests and Dividends are Subject to Withholding Tax at a Flat 30% Rate.
"8. Question: I am a student on an F-1 visa and have lived in the U.S. since 1998. Last year, I made $50,000 in short-term capital gains by day trading in stocks. Will I pay U.S. taxes on these gains?Answer: No. Foreigners entering the U.S. temporarily on an F-visa, an M-visa, or as a student on a J-visa or a Q-visa are not considered residents in this country for U.S. tax purposes. Therefore, you are not taxed on your long-term or short-term capital gains from the sale of stock and securities. Likewise, you cannot deduct any capital losses. Note: The sale of U.S. real property always is taxable, whether or not the seller is a non-resident foreigner or student. Foreign students should file Form 8843 to claim this non-residency exemption. All non-resident foreigners, including students, should provide their brokers with Form W-8 (Certificate of Foreign Status) to avoid having their trades reported to IRS".
Capital gains are probably the major part of the trading income. Under the general rule capital gains of non-residents received from the U.S. sources are not taxed with the U.S. This rule should also apply to Forex ordinary income with IRC 988 and short-term capital gains from securities.
Basically you are considered to be nonresident for tax purposes if you spent less than 183 days in the U.S. for individuals and if you don't have a U.S. office, business place or relationship that can be classified as a permanent residence for legal entities.
I do not like having to be in contest with the website you are quoting. It is highy regarded. However, I may have to take issue. with that. He was quoting a general rule.
let me quote from the IRS website on this subject:
"Nonresident alien students and scholars and alien employees of foreign governments and international organizations who, at the time of their arrival in the United States, intend to reside in the United States for longer than 1 year are subject to the 30 percent taxation on their capital gains during any tax year if during such tax year (usually calendar year) they are present in the United States for 183 days or more, unless a tax treaty provides for a lesser rate of taxation. This assumes that such capital gains are not effectively connected with the conduct of a United States trade or business. These capital gains would be reported on page 4 (not page 1) of Form 1040NR and would not be reported on a Schedule D because they are being taxed at a flat rate of 30 percent under I.R.C. § 871(a) or at a reduced flat rate under a tax treaty."
Please give me your tax treaty and I will see what your tax treaty provides. AND i will dig deeper to see if I can find an exception to what the IRS has provided.
My native country is India
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:
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.
Thank you, XXXXX XXXXX very informative.
Just a couple of hours back, I signed up with for a brokerage account using a W9 form. I was told by the company even though I am a non resident with F-1 Student visa,since I have a SSN and I have a US residence, I have to file the W9, which I did. This was done online,so there was an electronic signature at the end of the form( my name ) and I ticked mark the check box which said that I'm not subject to back up witholding. The other point is my income is below the 15% mark for this year.
Please correct me if I'm wrong, in other words, what I have done, is it equivalent to the 4 steps you have mentioned in the previous reply. In short, if I follow the last two points (3 and 4), I will not be subject to Capital gains tax.
Thank you once again.
Thank you for getting back to me.
What you have done is equivalent except that the broker is not clear on requirements for the statement regarding your status as contained in the W-9 form for Non Resident Aliens, or to file the W-8-BEN.
In a way it is moot. If the brokerage is not fully aware of treaty requirements, then they are not going to be asking for the form. they are correct that you have to file the W-9, but you also have to file the W-8-BEN.
Yes, I confirm that you must file form 1040-NR when you incur a capital gain.
I need to mention one more thing about capital gains tax.
The exclusion of capital gains tax for persons in the 15% bracket or below, pertains to long term capital gains, only.
The U.S. recongizes two kinds of capital gains, short term gains and long term gains.
Long term gains are the profits you make from investments you have held for 366 days or more.
Short term gains are the profits you make from investments you have held for 365 days or less.
Short term gains are taxed as regular income according to your tax bracket and adjusted gross income. Short term gains are added to addjusted gross income and can be taxes at any rate, depending on the tax bracket between 10% and 35%.
Here are the tax brackets in force now: http://taxes.about.com/od/2008taxes/qt/2008_tax_rates.htm
So if you are in a tax bracket by adjusted gross income of 15% or less, in order to gaurantee to avoid capital gains tax, you have to hold the investment for 366 days, minimum.
Thank you very much for all the information.
You are welcome. thank you for your comments and feedback.
I realized I have one more question. What forms do I need to file for NY state i.e. state tax.
Does the same rule apply for the long term and short term captial gains tax.
New York state does not recongize the tax treaties. Both the long and short term capital gains tax is taxed at 6.85 percent.
If you have to file the federal return you would file the new york tax return. Do you have any New York sourced income other than those capital gains?
Dear Mr Edward,
Thank you for your getting back to me.
This year I do not have a job in New York but I will be having one, beginning of next year.
Similar to the U.S. tax, the state consideres you a resident if you have lived in the state for 184 days or more and maintained a permanent abode. Unless you can prove you had a permanetn abode elsewhere and only maintained a residence in NY for a limited time, such as for school, then you have to be considered a resident for income tax purposes. when you get a job in NY and you also now maintain a residence for 184 days or more, you will have to file a resident return.
or FORM: http://www.tax.state.ny.us/nyshome/efile_addit201.htm
So from my understanding as I have been more than 184 days in NY. I need to file a
1040NR (where NR stands for non resident)
IT-150 (which is a resident form)
I'm not sure but are the forms conflicting in terms of their name -residency. I thought I should be filing IT-203.
IT 150 is the short form, Because you have capital gains you would likely flie the IT 203 for state.
As stated in NY law, even though they generally follow the IRS conventions, you can be a NR for federal and a Resident for state.
Wow your really good in tax issues. Thank you!!!
Based on your last reply regd. NY tax law, I'm guessing you mistakenly wrote IT-203 (which is a NonResident and part yr resident form). It should have been IT-201 (Resident form)
Yes, that was an error, I am sorry. I believe I gave you both forms in an earlier reply.
Here they are again:
I am located in NJ, and do NJ, PA, and NY Taxes. It goes with the territory. I also do tax consulting for the women's venture fund in NYC. (http://www.wvf-ny.org)
So I get around.
Thanks for the comments.
Can I recover any capital gains losses, on filing the 1040NR.
Thanks once again,
What do you mean be recover the capital gains and losses. Do you mean can you offset regular income by the capital losses?
I'm sorry that was an error. I don't have any income (from a job), besides that I have lost money in trading around $1700(capital losses). Can I recover capital losses using the 1040NR.
I apologize for not getting here before now. This question never showed back up in my que.
You can take capital losses on the form 1040 NR from stock trades and investments. you have to complete form Scheduel D: http://www.irs.treas.gov/pub/irs-pdf/f1040sd.pdf
youi enter the capital gain or loss form schedule D on line 14 of form 1040NR.
If all you had was losses and no income, there will be nothing to offset and the capital losses are carried forward to the next year.
Thank you for your reply.
Just to confirm what you are saying.
If I earn $60,000 next year (i.e. 2009) from which $20,000 is witheld in Federal and state taxes. My tax will be reduced to 18300 i.e. [20,000 - 1700 (capital losses from last year)].
Your advice has been very helpful. If possible, could I please have your office location. What are your fees for filing tax returns.