The United States (US) is notorious for its complex tax laws and strict reporting requirements. International brokers diligently ensure their investors and traders are compliant, even if they are not US citizens. This leaves many foreign traders asking, “Do I need to file and pay US taxes?”
Tax Requirements for Nonresident Aliens from Countries With a Tax Treaty
In a previous article, we explained some of the tax requirements for individuals who are US citizens or resident aliens receiving foreign income. But what if you are neither a citizen nor a resident of the United States? In that case, the US defines you as a nonresident alien and you may be required to file an annual Form 1040-NR Income Tax Return for Nonresident Aliens.
Whether a nonresident alien is required to file a return and pay taxes depends on the tax treaty between the US and their home country. The IRS.gov explains:
Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from US income taxes on certain items of income they receive from sources within the United States.
For example, under the US-Mexico Tax Treaty, a Mexican citizen who opens a US equities account with TradeStation can exclude income from interest and dividends.
Tax Requirements for Nonresident Aliens from Countries Without a Tax Treaty
But what if there is no treaty between the United States and your home country? Take for instance the United Arab Emirates (UAE). No tax treaty has been signed yet between the US and UAE. This is perhaps because no personal income and corporate taxes are levied in the Emirates’ free zones and the intent of tax treaties is to reduce or eliminate double taxation of income between countries. With no tax treaty in place, nonresident aliens are subject to the rules described in the instructions for Form 1040-NR and Publication 519.
There is relief for traders. IRS Publication 519 states:
If your only US business activity is trading in stocks, securities, or commodities (including hedging transactions) through a US resident broker or other agent, you are not engaged in a trade or business in the United States.
So for traders in Dubai, as with many other countries, if your only US-related income is trading, there is no requirement to file and pay taxes in the United States. Of course, the rules are complex and you should always consult with your tax advisor to determine if there are other activities or transactions that are required to be reported.