Nonresident alien taxation

This page is intended to summarize information on how a non-resident alien (NRA) is taxed when investing in US-domiciled ETFs. References to sources must be included as much as humanly possible.

Who is a non-resident alien (NRA)?
If you are an alien (not a U.S. citizen), you are considered a nonresident alien unless you meet one of two tests. You are a resident alien of the United States for tax purposes if you meet either the green card test or the substantial presence test for the calendar year (January 1-December 31).

In short, if you are not a US citizen or green card holder and have not been in the US for 183 days (calculated over a 3 year period), you are a nonresident alien for tax purposes.

Are Capital Gains taxable for a nonresident alien?
No. Capital gains from US-domiciled ETFs are not taxable by the IRS. According to IRS Publication 519 :

"A nonresident alien usually is subject to U.S. income tax only on U.S. source income". "If you were in the United States for less than 183 days during the tax year, capital gains are tax exempt unless they are effectively connected with a trade or business in the United States during your tax year."

Also, according to a reply that I got for a paid consultation with Greenback Expat Tax Services Limited:

"Investing in ETFs will not count as effectively connected income and therefore any capital gains from the sale of these will be tax free as a non-resident."

US-domiciled ETFs tax withholding
Tax withholding is applied to dividends paid to you as an investor. It does not apply to capital gains. The standard rate is 30%. This can be lowered (usually to 15%) if your country of residency has a tax treaty with the US, usually by submitting a W-8BEN form via your broker.

Estimating tax withholding leakage
Other than the tax withholding that shows on your brokerage account's statement, the fund itself gets taxes withheld on dividends received. This is usually applicable to funds holding international equities. This number affects us, but is mostly invisible unless you look at the annual reports.

For more information see: Estimating Level I tax withholding paid by US-domiciled funds.

TD Ameritrade tax withholding experiment
I ran a test under my TD Ameritrade account for a few US-domiciled ETFs: MUB, BIV, LQD, BNDX, VIG, VTI and VXUS. All had tax withheld at 30% of the dividends distributed except MUB and VXUS. I am not sure why VXUS was not taxed, maybe because all securities it holds are non-US.



US Estate taxes
In case the account holder (US non-resident alien) passes away, the US will levy up to 40% estate tax on that property over the value of $60,000 USD. This includes US-domiciled holdings such as ETFs, as well as cash sums in a US-based brokerage account.

Foreign Account Tax Compliance Act (FATCA) and NRAs
The Foreign Account Tax Compliance Act (FATCA) is a United States federal law that requires United States persons, including individuals who live outside the United States, to report their financial accounts held outside of the United States, and requires foreign financial institutions to report to the Internal Revenue Service (IRS) about their U.S. clients. Congress enacted FATCA to make it more difficult for U.S. taxpayers to conceal assets held in offshore accounts and shell corporations, and thus to recoup federal tax revenues.

If you are using a non-FATCA-compliant broker, 30% of total liquidated US assets can be withheld by the US and you will need to file a non-resident tax return form to get it back. To avoid that, use a FATCA-compliant broker. Most US brokers and larger international ones are FATCA compliant. Make sure to ask your brokerage firm if you are investing in US-domiciled securities.

Note: This needs confirmation and references.