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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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If a person from India (Citizen and residing in India) invests

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If a person from India (Citizen and residing in India) invests in US stock market NASDAQ. How will he be taxed ?

Will he be taxed as per indian Tax law or will he be taxed as per US tax law.

This is imporant because India tax is 15% on short term gains , in US it si 30% I guess

This investment will be more short term like Day trading - Not Long term which can be called capital gains or losses

LEV :

Hi and welcome to Just Answer!
In the US nonresident aliens are taxed ONLY on income from US sources.
For rules to determine the source of income - see IRS publication 519 - www.irs.gov/pub/irs-pdf/p519.pdf
In most cases, the gain received from trading domestic corporation shares is US source income. The gain derives from trading foreign corporation shares is usually foreign source income.
If your only U.S. business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U.S. resident broker or other agent, you are not engaged in a trade or business in the United States. Thus - such income is NOT is treated as effectively connected income.- and is taxes at flat 30% federal income tax rate.

LEV :

I verified the US-India tax treaty - see here - http://www.irs.gov/pub/irs-trty/india.pdf
ARTICLE 13 Gains
Except as provided in Article 8 (Shipping and Air Transport) of this Convention, each Contracting
State may tax capital gain in accordance with the provisions of its domestic law.
So far - there is no exemption provided by the treaty.

Customer:

so indian citizen investing in us stock market has to pay flat 30% tax on profits...am i right ?

LEV :

That is correct - if the Indian citizen is a nonresident alien.

Customer:

ok..I think non resident alien means he is not residing in US ..Am i right ?

LEV :

That is correct. IRS publication 519 - page 5 - there is a chart to determine if the person a resident alien or a nonresident alien.

LEV :

A resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether from sources within or outside the United States.
A nonresident alien usually is subject to U.S. income tax only on U.S. source income.

LEV :

For instance - the interest in the US bank is not considered from US sources and is not taxable for the nonresident alien.

Customer:

OK , Understood. But how can US tax ndian citizens , they do not have any ssn or US ID,,,we just have a passport

LEV :

When you open an account with the US broker - the broker will required to withhold 30% tax.

Customer:

OK so the profits an indian citizen ( non resident alien ) earns on US stocks is considered as U.S. Source income


Is my understanding correct ?


 

LEV :

That is correct.


 

Customer:

Thank you LEV you answered all of my questions

LEV :

Sorry if you expected differently.

Customer:

No Problem at all

Lev and 2 other Tax Specialists are ready to help you
Some corrections...
Sorry for confusions.
Please see this example from IRC regulations - http://www.gpo.gov/fdsys/pkg/CFR-2012-title26-vol9/pdf/CFR-2012-title26-vol9-sec1-871-7.pdf

Example 1. B, a nonresident alien individual not engaged in trade or business in the United States and using the calendar year as the taxable year, is present in the United States from May 1, 1971, to November 15, 1971, a period of more than 182 days. While present in the United States, B effects for his own account on various dates a number of transactions in stocks and securities on the stock exchange, as a result of which he has recognized capital gains of $10,000. During the period from January 1, 1971, to April 30, 1971, he carries out similar transactions through an agent in the United States, as a result of which B has recognized capital gains of $5,000. On December 15, 1971, through an agent in the United States B sells a capital asset on the installment plan, no payments being made by the purchaser in 1971. During 1972, B receives installment payments of $50,000 on the installment sale made in 1971, and the capital gain from sources within the United States for 1972 attributable to such payments is $12,500. In addition, during the period from January 1, 1972, to May 31, 1972, B effects for his own account, through an agent in the United States, a number of transactions in stocks and securities on the stock exchange, as a result of which B has recognized capital gains of $20,000. At no time during 1972 is B present in the United States or engaged in trade or business in the United States. Accordingly, for 1971, B is subject to tax under section 871(a)(2) on his capital gains of $15,000 from the transactions in that year on the stock exchange. For 1972, B is not subject to tax on the capital gain of $12,500 from the installment sale in 1971 or on the capital gains of $20,000 from the transactions in 1972 on the stock exchange.


As we see a nonresident alien who spent in the US less than 183 days DO NOT pay any taxes on capital gains realized from trading stocks.
You must provide Form W8-BEN and additional required documents to your broker and establish that you are a nonresident alien and claim that you are the beneficial owner of the income.
Sorry for confusion.