Hi and welcome to our site!First of all - "foreigner" might be a resident alien or a nonresident alien for tax purposes.Resident aliens are taxed on all worldwide income.Nonresident aliens are taxed ONLY on income from US sources.
There are some complex rules to determine the source of income. You may take a look - page 12 IRS publication 519 - http://www.irs.gov/pub/irs-pdf/p519.pdf - Table 2-1. Summary of Source Rules for Income of Nonresident Aliens.
That is correct - resident aliens are taxed similar to US citizens - and should report all worldwide income on their US income tax return. That includes all types of investment income.
Resident and nonresident aliens are taxed in different ways. Resident aliens are generally taxed in the same way as U.S. citizens. Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a U.S. trade or business.
investment itself is not taxable - but income realized from that investment will be added to other taxable income. For instance if you sell stocks and realize the gain - that gain is taxable. If stocks pay dividends - these dividends are taxable as well.
Resident aliens are generally taxed in the same way as U.S. citizens. This means that their worldwide income is subject to U.S. tax and must be reported on their U.S. tax return. Income of resident aliens is subject to the graduated tax rates that apply to U.S. citizens. Resident aliens use the Tax Table or Tax Computation Worksheets located in the Form 1040 instructions, which apply to U.S. citizens.See tax rate schedule on the last page of this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf
Nonresident aliens are taxed ONLY on income from US sources.The tax rate for income which is effectively connected with a U.S. trade or business - is the same as for US persons referenced above.Income that is NOT effectively connected with a U.S. trade or business - like investment income - is subject of flat 30% tax rate unless the tax treaty allows to use lower rate.
Please be aware that if a nonresident alien sells stocks and realize the gain - that gain is NOT from US sources and is not taxable in the US, but if stocks pay dividends - these dividends are taxable if these are shares of US company - and not taxable if dividends are paid by a foreign company.
Thus - nonresident aliens are taxed ONLY on income from US sources.
When you open an investment account - the broker will ask to fill a form W9 for resident aliens and W8BEN for nonresident aliens. That will tell the broker alien's tax ID and the status - resident or nonresident. So the broker will know how to report that income and if there is any withholding.
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