Sergei Tokmakov, Attorney — California Bar #279869
The General Rule: No US Tax on Stock Sales
Non-resident aliens generally pay no US federal tax on capital gains from selling stocks, bonds, or other securities - regardless of how much profit they make.
This is one of the most attractive aspects of US investing for foreigners. While you'll face 15-30% withholding on dividends, your capital appreciation grows and can be realized tax-free (from the US perspective). This makes growth-focused investing particularly attractive for international investors.
Why Capital Gains Are Generally Tax-Free
- Under US tax law, capital gains are generally sourced where the seller resides, not where the asset is located
- Non-resident aliens are only taxed on US-source income; capital gains from stocks are considered foreign-source for NRAs
- This applies to both short-term and long-term capital gains
- No withholding is required on stock sale proceeds (unlike dividends)
- No US tax return filing required solely for capital gains from stock trading
Capital Gains vs. Dividends: Tax Comparison
This comparison illustrates why many international investors prefer growth stocks over dividend stocks:
| Income Type | US Tax for Non-Residents | Withholding | Filing Required |
|---|---|---|---|
| Capital Gains (stocks) | Generally 0% | None | No |
| Dividends (with treaty) | 10-15% | Automatic | No |
| Dividends (no treaty) | 30% | Automatic | No |
| REIT Capital Gains | 30% (usually) | Automatic | No |
| US Real Estate Sales | 15% FIRPTA + rates | Automatic | Yes |
Investment Strategy Implication
This tax structure means international investors often benefit from focusing on growth stocks (like tech companies that don't pay dividends) rather than high-dividend stocks. Your gains compound tax-free (from the US side), while dividends face immediate withholding.
Important Exceptions: When Capital Gains ARE Taxed
While the general rule is favorable, there are several important exceptions where capital gains become taxable. Understanding these is crucial for compliance.
183-Day Presence Rule
If you're present in the US for 183 days or more during the tax year, capital gains become taxable at a flat 30% rate. This is a hard rule - even one day over 182 can trigger full taxation. Track your days carefully if you travel to the US frequently.
US Real Property Interests (USRPI)
Gains from selling US real estate or shares in "US Real Property Holding Corporations" (companies where US real estate constitutes more than 50% of assets) are taxed under FIRPTA. This includes most REIT shares. 15% withholding applies at sale, and you may owe additional tax.
Effectively Connected Income (ECI)
If your trading constitutes a US trade or business, gains become "effectively connected" and taxable at regular rates. This is rare for passive investors but can apply to very active traders with a US presence or those using US-based trading operations.
Partnership or Flow-Through Interests
Gains from selling interests in US partnerships or LLCs taxed as partnerships may be treated as ECI and subject to US tax, depending on the underlying assets and activities. This is complex - seek advice before selling such interests.
Certain Contingent Payments
Gains from contingent payment debt instruments or certain other specialized instruments may be treated as ordinary income rather than capital gains, potentially triggering different tax treatment.
The 183-Day Trap
I've seen investors unknowingly cross the 183-day threshold, turning a tax-free gain into a 30% tax bill. If you visit the US frequently, maintain careful records of entry and exit dates. Days count as whole days - even arriving at 11 PM counts as a full day present. Consider using a tracking app or spreadsheet.
USRPI and FIRPTA: The Real Estate Exception
The most common exception affecting stock investors is the US Real Property Interest (USRPI) rule under FIRPTA (Foreign Investment in Real Property Tax Act).
What Counts as USRPI?
Assets Subject to FIRPTA
- Direct ownership of US real estate (land, buildings, condos)
- Shares in US Real Property Holding Corporations (USRPHCs)
- Most REIT shares (Real Estate Investment Trusts)
- Interests in partnerships that hold US real estate
- Certain rights to minerals, timber, or crops
REIT Special Rules
REITs create particular complexity for foreign investors:
REIT Taxation for Non-Residents
- REIT dividends: Generally subject to 30% withholding (treaty rates usually don't apply)
- Capital gain distributions: Treated as USRPI gains, subject to withholding
- Selling REIT shares: If you own 10% or more, FIRPTA applies with 15% withholding
- Publicly traded exception: If you own 10% or less of a publicly traded REIT, sale gains may be exempt from FIRPTA
Practical Advice on REITs
For most foreign investors, the tax treatment of REITs is unfavorable compared to regular stocks. Unless you have specific reasons to hold REITs (like diversification or yield needs you can't meet otherwise), consider avoiding them in favor of growth stocks or Ireland-domiciled real estate ETFs.
Don't Forget Your Home Country Taxes
While your US capital gains may be tax-free from the American perspective, your home country likely taxes worldwide income - including those gains.
Home Country Considerations
- Most countries tax their residents on worldwide income, including foreign capital gains
- Some countries (like Singapore, Hong Kong, UAE) have no capital gains tax
- Others (like UK, Germany) have specific rates and allowances for capital gains
- Tax treaties may provide relief from double taxation, but relief for capital gains varies
- You may need to report your US brokerage account under local financial account reporting rules (like CRS)
Country-Specific Examples
UK: Capital Gains Tax applies with annual exempt amount. Germany: 26.375% flat tax on gains. Australia: Gains taxed as income with 50% discount for assets held 12+ months. Japan: 20.315% on gains. Always consult a tax advisor in your home country.
US Reporting Requirements
Good news: if you're only earning capital gains from passive stock trading and don't trigger any exceptions, you generally don't need to file a US tax return.
When You DON'T Need to File
No Filing Required If:
- Your only US income is capital gains from selling publicly traded stocks
- You weren't present in the US for 183+ days during the tax year
- You didn't sell USRPI (real estate or REIT shares over 10%)
- Your trading doesn't constitute a US trade or business
When You MUST File
Filing Required If:
You sold US real property or USRPI (need to report FIRPTA and potentially claim reduced withholding). You were present 183+ days and have gains (need to report and pay tax). You have effectively connected income from US business activities. You want to claim a refund of over-withheld taxes.
Related Resources
Complex Tax Situation?
If you're unsure whether exceptions apply to your situation, or need help structuring your investments for tax efficiency, I can help you navigate the rules.
Sergei Tokmakov, Attorney — California Bar #279869