Trading stocks in the U.S. market is not just for American citizens. While U.S. stocks and bonds are regulated by U.S. law, there are no explicit provisions prohibiting non-U.S. citizens from investing in the U.S. stock market and many investment firms cater to international clients who wish to purchase U.S. stocks. There are, however, several important factors that those who are not U.S. citizens should consider before investing in the U.S. market.
Restrictions And Regulations
One of the goals of the Patriot Act, passed after the 9/11 terrorist attacks, is to prohibit organizations and individuals linked to terrorism from financing their illegal operations through American markets. This means that brokerage firms are required to verify customer identities and report any suspicious account activity to the government. These regulations, of course, do not have an effect on the vast majority of individual international investors. Additionally, you should always make sure to work with a reputable international broker to ensure that you are complying with the array of ever-changing regulations that govern U.S. stocks.
Choosing A Brokerage Account
International investors in the U.S. stock market generally choose to use a brokerage firm to manage their investments. Using a reputable broker ensures that your investments will comply with applicable laws, and a U.S.-based broker who is familiar with international investments can help you navigate the sometimes complicated world of American stocks.
When choosing a brokerage firm, make sure that they work with international investors. It is worthwhile to check that they work with your specific country of residence, as some brokerage firms only serve certain areas. Additionally, some brokers require additional documentation from international investors, including proof of identity, visa information and tax documents. The W-8BEN is a common tax form required for foreign investors. Many international investors choose to work with a web-based brokerage account so that they can access their accounts from anywhere at any time, without worrying about finding a branch location. Many web-based brokerage firms specifically cater to international investors.
Tax Implications Of U.S. investments
If you qualify as a non-resident foreign national of the U.S., you are not subject to capital gains tax. This means that your brokerage firm will not withhold that tax from earnings on international investments. However, most countries require that residents pay capital gains tax on money earned in foreign markets, so you may have to report the income and capital gains at home.
Earned dividends are taxed as income for non-resident foreign nationals. Non-resident foreign nationals are subject to a flat 30 percent tax rate on their income. Earned dividends, which come directly from the U.S. companies you invest in, are considered income. There are some situations in which you may be subject to a lower rate, depending on any treaties your home country has with the U.S. and if the dividends are interest-related. Navigating international taxation is another reason it is important to work with an international broker. A reputable broker will make sure you are aware of any U.S. tax implications of your investments.
- IRS: Instructions for Form W-8BEN-E
- Stockbrokers.com: International Stock Brokers
- Investopedia: Do non-U.S. citizens living outside the U.S. pay taxes on money earned through a U.S. internet broker? Read more: I am a non-U.S. citizen living outside the U.S. and trading stocks through a U.S. internet broker. Do I have to pay taxes on the money I earn?
- Investopedia: USA Patriot Act
- Zedcor Wholly Owned/PhotoObjects.net/Getty Images