# Non resident alien capital gain income?



## powerdrw (Mar 31, 2019)

First of all, I want to thank this forum! It is truly helpful. I've read quite some useful messages here. Many people share their knowledge to help out 

I have tried to search for answers but couldn't find it. Please let me just ask here (forgive if this is a duplicate):


I'm asking for a close friend who was non-resident alien in 2018, and didn't visit the US at all the whole year. 

The only US income he had was a brokerage account for stock investment. The brokerage institution had his W8BEN on record.

In 2018 he had only 3 US income as follows:

1. $2000 Dividend reported on 1042-S. It's withheld 30% on 1042-S already (box 7a)

2. $550 capital gain distribution reported on 1042-S: 
The income code on box 1 is 36 (capital gain distribution). 
The tax withheld box 7a is only around $30. 
The exemption code in box 3a is 02 (Exempt under IRC (other than portfolio interest)). The exemption code in box 4a is 15 (payee not subject to chapter 4 withholding).
The tax rate in box 3b is 00.00, and the tax rate in box 4b is also 00.00


3. $5000 capital gain from stock sell.


*My question is: does he need to file 1040 NR at all for 2018?*


For income 1 ($2000 Dividend), since it's already withheld at 30% rate and my understanding is that 1042-S itself already satisfies reporting purpose, since the government will also receive a copy of it. So there's no tax owed and reporting requirement is completed by 1042-S

For income 3 ($5000 capital gain), I know that for nonresident alien, capital gain is not taxable. I'm not sure if this capital gain needs to be separately reported on 1040NR? (I would guess not)?

For income 2 ($550 capital gain distribution). This I'm not sure. It's only withheld $30, less than the 30% withhold rate. However, there are exemption code 02 in box 3a and code 15 in box 4a, saying "exempt under IRC (other than portfolio interest)" and "payee not subject to chapter 4 withholding", respectively. Also box 3b, 4b, about tax rate are both 0. Does this mean that for this income, it doesn't owe tax (since it's exempt?), and that reporting requirement is also already satisfied since it's on 1042-S?



Is this correct? Or does he need to file 1040 NR (why)? I don't think he has ITIN either.


Thanks a bunch layball:


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## Bevdeforges (Nov 16, 2007)

If his various income sources have all been withheld, I think it's safe to say that he probably doesn't need to bother filing. Seems to be the case only where there is business income that has to be declared, or over-withholding where he could potentially claim back a refund.


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## JustLurking (Mar 25, 2015)

powerdrw said:


> My question is: does he need to file 1040 NR at all for 2018?


As Bev says, almost certainly not. The general rule is that where US tax for an NRA is exactly satisfied by withholding, there's no need for any 1040NR nonsense. If you look at '_Table A. Who must file a 1040NR_' in the form's instructions you should see that your friend's case is not one of the 'must file' ones.

As for a few of the details you gave, 1 and 3 are straightforward. 2 is odd, since the US generally doesn't tax capital gains for NRAs. However -- and isn't there always a 'however' with the IRS? -- it looks like a sneaky part of IRC 871 can convert part of a short term capital gains distribution into a taxable dividend. Maybe that happened here, to $100 of it, though from your description the paperwork is entirely unclear on the matter. Probably not worth chasing down, though.

One final thought. What actual investment is this?

If it is something like an S&P 500 index fund or ETF, your friend would do better investing through a non-US domiciled ETF instead. Something domiciled in Ireland, for example, can use the US/Ireland treaty to obtain a 15% tax rate on US dividends, and Ireland then pays them out to investors anywhere in the world with no further tax deducted. Most ETFs used by EU investors are domiciled in Ireland, for good reason.

Also, a dividend of $2k suggests an investment holding of perhaps around $100k. If that's the case, your friend should note that US estate taxes for NRAs apply to all aggregate US holdings above a miserly $60k. It is possible then that your friend's investments are at risk of confiscatory and entirely unjustified US estate taxes. As above, investing through a non-US entity, such as an Ireland domiciled ETF, will counter that threat.


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## powerdrw (Mar 31, 2019)

JustLurking said:


> As Bev says, almost certainly not. The general rule is that where US tax for an NRA is exactly satisfied by withholding, there's no need for any 1040NR nonsense. If you look at '_Table A. Who must file a 1040NR_' in the form'syou should see that your friend's case is not one of the 'must file' ones.
> 
> As for a few of the details you gave, 1 and 3 are straightforward. 2 is odd, since the US generally doesn't tax capital gains for NRAs. However -- and isn't there always a 'however' with the IRS? -- it looks like a sneaky part of can convert part of a short term capital gains distribution into a taxable dividend. Maybe that happened here, to $100 of it, though from your description the paperwork is entirely unclear on the matter. Probably not worth chasing down, though.
> 
> ...


Thanks for the details! Yea for case 2 it was unclear why it's only withheld at this amount, instead of 30%. I guess what you said makes sense. It'd be a very unpleasant experience if it turns out that he needs to file with such small amount of income, let alone that the authority could have already withheld the full amount upfront but just didn't do it. The overall amount is minimum tho I'd say.


> which investment?

From what I learned it was just stock - tech sector I believe, probably not mutual fund or other instruments. But I didn't ask the amount tho. Thanks for the pointers. I will point him to this thread!


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## exclamation (Mar 9, 2019)

Any NRA with experience of holding US bonds? I am interested if income would be taxed...


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## Bevdeforges (Nov 16, 2007)

exclamation said:


> Any NRA with experience of holding US bonds? I am interested if income would be taxed...


Are you referring to US savings bonds - i.e. those issued by the US government - or bonds issued by companies in the US?

Generally speaking, bond interest paid to a "foreign person" has a 30% withholding taken out before the interest is remitted. This page from the IRS may be of help: https://www.irs.gov/individuals/international-taxpayers/nra-withholding


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## JustLurking (Mar 25, 2015)

exclamation said:


> Any NRA with experience of holding US bonds? I am interested if income would be taxed...


There are significant exceptions to the 30% general rate mentioned above, though. For example:

https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens-exclusions-from-income


> Nonresident Aliens - Exclusions From Income
> U.S. Source Interest Income that is not connected with a U.S. trade or business is excluded from income if it is from:
> ...
> Interest on obligations of a state or political subdivision, the District of Columbia, or a U.S. possession, generally is not included in income. However, interest on certain private activity bonds, arbitrage bonds, and certain bonds not in registered form is included in income, or ...


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