Making a profit from Robinhood? Here’s everything a nonresident needs to know about their trading tax requirements

Robinhood investment income tax for nonresidents in the US

Over recent weeks, stock trading apps, such as Robinhood and Etrade, have featured prominently in news headlines – dominating the public psyche more than ever before.

Gone are the days when investing in stocks and shares was limited to Wall Street traders.

In January 2021, when a large group of Reddit users banded together to invest in the video game retailer GameStop, we saw a clear demonstration of just how easy it has become to invest your money and make a profit.

In fact, nowadays, anyone can invest from their phone while on the go.

But if you’re making a profit from stock trading apps, there is one important factor to keep in mind: if you are investing in a share or other property which is located in the US, it’s likely that you will have to pay tax to the IRS on your profits.

In fact, thousands of Sprintax customers included Robinhood as a source of income on their 2020 tax return!

As a nonresident in the US, you may be feeling a little daunted by the prospect of filing a return and paying your taxes.

So, with that in mind, we’ve put together a handy guide to cover everything you need to know about tax if you are making a profit through trading apps.

US nonresidents earn investment income

Can nonresidents earn profit from investments while in the US?

Yes. In the US, investment income is considered to be passive income.- i.e. not effectively connected with the conduct of a United States trade or business. And there is no limit on the amount of passive income that nonresidents on F or J visas can earn while in the US.

However, it is important to keep in mind that F and J visa holders are not entitled to trade actively or be considered professional traders.

If you do trade professionally, this may be considered as work (effectively connected with the conduct of a US trade or business) and a violation of your visa conditions.

Do I have to pay tax on my investment income?

Yes. However, exactly how you are taxed will depend on your personal circumstances.

Typically, if you have been in the US for more than 183 days in a taxable year, your share investment profit will be charged a capital gains tax of 30%.

Note: this tax will only apply if you have invested in the shares yourself. It will not apply if you provided services which resulted in this gain (for example if you were paid shares for your services). Such income is typically treated as wages, if the stock options are paid as per your contract. (This type of taxation also does not cover investment in real property interest.)

Any dividends that you receive from your investment will also be liable for tax at 30%.

It is also important to note that you may be exempt from tax – or due to pay tax at a reduced rate – if you are entitled to claim tax treaty benefits.

Finally, it’s important to be aware that tax will be due in the year you are issued with the profit and not the year in which it is received by the investor. So, for example, if a dividend payment date is in 2020 but you do not receive it until 2021, this income will be considered taxable in 2020.

Tax documents for U.S. sourced investment income

I made a profit from share trading apps. What tax documents do I need to file?

W-8BEN

Every nonresident who earns a profit from an investment in shares will be subject to US tax at a rate of 30%.

However, if you are from a country that has a double taxation treaty agreement with the US, you can avail of a reduced rate of tax deducted.

To claim this reduced rate, you must complete a W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding). The purpose of the form is to confirm the country you live in and to confirm you are not a resident in the United States.

Need a hand preparing your W-8BEN? Sprintax TDS can help you!

Prepare your W-8BEN here

1099B / 1099INT / 1099DIV

If you did not complete a W-8BEN to declare that you are a nonresident, you may be issued with the following forms: 1099B, 1099INT, 1099DIV .

If you traded through Robinhood or another broker, you’ll probably receive a 1099B statement.

This tax form lists gains and losses on the transactions investors carry out throughout the tax year.

Typically, it will include information such as the dates shares were sold and, in many cases, the value when you acquired the stock, which is used to calculate your gain.

Similarly, you will also receive a 1099INT if you earned interest from your investment and a 1099DIV if you earned a dividend.

Form 1042-S

Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding) is used to report certain types of income paid to nonresidents by a US based institution or business. You will typically receive a 1042-S if you earn income from investments.

The below types of investment related income may all be reported on your 1042-S form:

Code Tax rate
Income code 1 Interest paid by US obligors is typically taxed at 30% (unless a Tax Treaty applies)
Income code 6 Dividends paid by US corporations is typically taxed at 30% (unless a Tax Treaty applies)
Income code 9 Capital Gains If you are in the US for more than 183 days, you will be obliged to pay 30% in Capital Gains tax. You will not be charged tax if you were in the US for less than 183 days.

Form 1040-NR

You must file a Form 1040-NR at the end of the tax year to report the income you have earned during the tax year.

Filing a US tax return with Sprintax

Case study examples

Case Study 1

Martha is a German international student in the US on an F-1 visa. She was in US for the entire 2020 and 2021. She purchased 1000 shares in Apple stock for $43.11. She then sold them in December 2020 for $68.79 – making a nice profit of $25.68 per share, totalling in $2566.80. Martha also received $94.00 in dividends from Apple in 2020. What does need to know about tax?

1. Capital Gains Tax

The profit of $2566.80 would typically be subjected to the nonresident Capital Gains Tax rate of 30%.

However, Germany has a tax treaty with US, which can reduce capital gain tax rate to 0% if the student provides a properly completed W-8BEN form to the payer. The student should also receive a 1042-S form from the trader which details any tax to be deducted under income code 9.

It is also important to note that you can’t claim a tax treaty benefit if you hold more than 10% of the voting shares.

2. Dividends

Dividends earned by nonresidents are typically subjected to a tax rate of 30%. However, as Germany has a tax treaty with the US, this tax rate can be reduced to 15% if the student properly completes their W-8BEN form. The student should also receive a 1042-S form from the trader which details any tax to be deducted under income code 6.

Case Study 2

Originally from China, Yao is in the US as a J-1 researcher. On Tuesday 23 January 2021, Yao purchased 100 shares in GameStop at $87.23. He sold his shares for $306 on Friday 29 January. What tax liability will Yao have in 2021?

The total profit in this example is $2187.70. This will be subjected to the nonresident Capital Gains Tax Rate of 30%. While China does have a Tax Treaty with the US, it does not cover the sale of corporate shares. Therefore, Yao will be liable for CGT if he is in the US for more than 183 days in 2021.

If Yao completes his W-8BEN properly, he should receive a 1042-S form which details the tax due to be deducted under income code 9.

Sprintax 1040NR investment income tax

Who can help me with US nonresident tax?

One word – Sprintax!

Sprintax was created specifically with nonresidents on F, J, M and Q visas in the US in mind, to ensure an easy tax prep process and guarantee full compliance with the IRS tax rules.

Our software can help you prepare every nonresident tax document you are required to file in the US.

We will guide you through the entire process – helping you to claim every tax relief you’re due to minimize your investment tax bill.

With Sprintax you can:

  • Save time and stress!
  • Determine your residency status
  • Prepare a fully compliant US tax return
  • Maximize your legal tax refund for federal, state & medicare incl. tax treaty benefits
  • Avail of our 24/7 Vita Qualified Live Chat facility

To get started, simply create your account here or login.

 

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Hey I'm Stacy! I'm dealing with US taxes and can't wait to help you prepare your tax return! I've been working with taxes for like forever, so you can totally trust my expertise. Sprintax can make things much easier for you. Check out my blog posts and feel free to ask me any questions.

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