There are a few specifics you need to consider as you read the following answer for non-resident investors paying US tax.
- Dividends will generally be considered FDAP Income (Fixed, Determinable, Annual Periodic), taxed at a fixed rate for a non-resident.
- Effectively Connected Income (ECI) will be taxed differently than straight income from investments. Assuming you are just an investor, you probably don’t have ECI, but need to consider the possibility.
- Capital gains may be FDAP or may not depending on the nature of the underlying assets.
- Your resident home country may have a tax treaty with the US, which may or may not lower your effective tax rate for US sourced income and gains. If not then 30% is generally the statutory rate.
Fixed, Determinable, Annual, Periodical (FDAP) Income
Fixed, Determinable, Annual, or Periodical (FDAP) income is all income, except:
- Gains derived from the sale of real or personal property (including market discount and option premiums, but not including original issue discount)
- Items of income excluded from gross income, without regard to the U.S. or foreign status of the owner of the income, such as tax-exempt municipal bond interest and qualified scholarship income
Income is fixed when it is paid in amounts known ahead of time. Income is determinable whenever there is a basis for figuring the amount to be paid. Income can be periodic if it is paid from time to time. It does not have to be paid annually or at regular intervals. Income can be determinable or periodic, even if the length of time during which the payments are made is increased or decreased.
Tax Treatment of FDAP Income Which is Not
Tax at a 30% (or lower treaty) rate applies to FDAP income or gains from U.S. sources, but only if they are not effectively connected with your U.S. trade or business. The 30% (or lower treaty) rate applies to the gross amount of U.S. source fixed or determinable, annual or periodical gains, profits, or income. Deductions and netting are not allowed against FDAP income.
The following items are examples of FDAP income:
- Compensation for personal services (such as commissions and gross proceeds from performances)
- Original issue discount
- Pensions and annuities
- Real property income, such as rents, other than gains from the sale of real property
- Scholarships and fellowship grants
- Other grants, prizes and awards
- A sales commission paid or credited monthly
- A commission paid for a single transaction
- The distributable net income of an estate or trust that is FDAP income, and that must be distributed currently, or has been paid or credited during the tax year, to a nonresident alien beneficiary
- A distribution from a partnership that is FDAP income, or such an amount that, although not actually distributed, is includible in the gross income of a foreign partner
- Taxes, mortgage interest, or insurance premiums paid to, or for the account of, a nonresident alien landlord by a tenant under the terms of a lease
- Prizes awarded to nonresident alien artists for pictures exhibited in the United States
- Purses paid to nonresident alien boxers for prize fights in the United States
- Prizes awarded to nonresident alien professional golfers in golfing tournaments in the United States
- Payments to U.S. parties when an nonresident alien entertainer has rights to the performance
If you were present in the United States for 183 days or more during the tax year, and you are still a nonresident alien, your net gain from sales or exchanges of capital assets is taxed at a 30% (or lower treaty) rate. For purposes of the 30% (or lower treaty) rate, net gain is the excess of your capital gains from U.S. sources over your capital losses from U.S. sources. This rule applies even if any of the transactions occurred while you were not in the United States. The183-day test mentioned above is not the same as the 183-day test used in the substantial presence test. See The Taxation of Capital Gains Of Nonresident Alien Students, Scholars and Employees of Foreign Governments for further information.
If you were in the United States for less than 183 days during the tax year, you will not be taxed on your capital gains, except for the following types of gains:
- Gains that are effectively connected with a trade or business in the United States during your tax year
- Gains on the disposal of timber, coal, or domestic iron ore with a retained economic interest
- Gains on certain contingent payments received from the sale or exchange of patents, copyrights, and similar property
- Gains on certain transfers of all substantial rights to, or an undivided interest in, patents
- Gains on the sale or exchange of original issue discount obligations
Many tax treaties contain provisions which reduce or eliminate taxation on capital gains.
What Capital Gains Are Taxed?
These rules apply only to those capital gains and losses from sources in the United States that are not effectively connected with a trade or business in the United States. They apply even if you are engaged in a trade or business in the United States. These rules do not apply to the sale or exchange of a U.S. real property interest, or to the sale of any property that is effectively connected with a trade or business in the United States.
Reporting Gains and Losses
Report your gains and losses from the sales or exchanges of capital assets that are not connected with a trade or business in the United States on Schedule NEC, Tax on Income Not Effectively Connected with a U.S. Trade or Business, of Form 1040NR. Report gains and losses from sales or exchanges of capital assets (including real property) that are connected with a trade or business in the United States on a separate Form 8949, summarized on Schedule D (from Form 1040) and page 1 of Form 1040NR. Attach Form 8949 and Schedule D to Form 1040NR.