Tax Advantages of Foreign Stock Traders and the FATCA Regulations

Disclaimer: I’m not a tax advisor. I state facts and my personal interpretation/opinion based on those facts. I don’t have to be politically correct. Always do your own due diligence and consult with your licensed tax advisor. I am not responsible for your tax situation.

“There are two certainties in life – death and taxes”. Sure they are certainties, but they’re not necessarily pleasures. Death is natural, tax is man made. Death is viewed based on faith, tax has high expectation of real returns in value. If the burden of tax grows higher than foreseeable benefits, then it’s simply not a good trade-off. Part of what discourage tax filers is the burden of filing every asset that you have, your income, domestic and oversee assets, and everything else. For many people, even if you understand tax and have proper planning to reduce your tax payment greatly, it is such a turn off having to disclose your financials every year. If you happen forget some tiny thing, you’re screwed. Mentally, it prevents a sense of complete financial freedom.

When FATCA became law in 2010 and came to effect in 2012, thousands of US citizens gave up their citizenship, not because of avoiding taxes, but because of the complication in this tax code that adds burdens people’s lives. See here. FATCA stands for Foreign Account Tax Compliance Act, the law forces citizens to report all of their foreign assets in their income tax return, otherwise facing troubles. It also forces all foreign banks to report  assets of any person with English name, having US address or related information to the IRS, otherwise facing a 30% tariff. Sure, it is an effort to track down people who evade tax laws by hiding assets oversea. Foreign banks are forced to comply, but this strategy has more downside risk than upside potential in effectively collect tax:

  • The US will be seen as hostile to both her own people and to international banks. It’s a lose-lose situation where international banks don’t want to take more US clients just because of the burden in working with the IRS to monitor their citizens.
  • It drives people away. The US tax code is already complicated. For ordinary people, it seems that it’s a lifetime homework they have to get A+ in, otherwise they’re going to get punished. They might be able to live with a moderate change of the tax code from time to time that they see reasonable and easy to adapt without fearing their lives are on the line. For many, FATCA is just too much. They’d rather give up their citizenship to live stress free.
  • It makes US even less attractive as a land of opportunity. Sure US was the best option for having a citizenship for many smart people around the world. If you are one of those citizens in development country who have ever dreamt that way, I’m sure you know the feeling. Soon you realize that being the best person you can be, living stress free is more important than having an US citizen status, and you know that this policy is just adding unnecessarily burden without adding real trade-off value.
  • It makes US look weak. It seems to everyone that this is one of the last resorts to collect tax from US citizen. It makes US look weak in foreigners eyes because the IRS has to go an extra mile to collect tax, even by threatening foreign banks to release information. It also make US seem like they’d rather give up the chance for healthy international business relationship, and keeping the majority of its citizen happy, just to crack down on a few cases of tax evasion.

Fortunately, foreign stock traders trading US securities don’t have any obligation to file or pay capital gain tax. In terms of capital gains, non-resident aliens are subject to no U.S. capital gains tax, and no money will be withheld by the brokerage firm (Source: Investopedia). It means that unless you are holding stocks for the long term and receiving dividends (which has 30% witholding tax regardless), you don’t have to file or pay tax to the United States’ Internal Revenue Service at all. Interactive Brokers had a seminar about this before. They confirm that brokers will never withhold percentage of money from foreign stock traders.

You are even more fortunate if you live in one of those countries where personal income tax is not a part of life, literaly. In countries where a lot of people don’t have the mean to even support themselves, and school education is a fancy thing, governments would rather pass the tax burden to corporations. These include some Southeast Asia countries. When every government is too busy trying to squeeze its own citizens dry, combining international laws will give you the most freedom. Imagine the choice you can make for yourself to actually trade what you earn for what you see reasonable and actually adds value to your life and others, instead of paying a percentage of what you earn every year for what you don’t have the power to do audit and do your due diligence on it. Of course everyone has different way of looking at it, but it doesn’t mean that this type of thinking is rare.

In summary, if you fit these criterias, you will have tax advantage as a stock trader:

  • You are considered to be non-resident alien of the United States for tax purposes. You can travel to the US for vacation, but you can’t stay longer than 183 days under any status. There are some exceptions to F-1 VISA, but it is a small demographic and not my focus for today. In short, you must be considered a complete foreigner having an account with an US brokerage firm.
  • You trade US securities.
  • You don’t hold US investments for dividend. In short, you are a trader, not an investor.

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