Stock trading is no longer reserved for Wall Street professionals. With trading apps such as Robinhood and E*TRADE, anyone with a smartphone can now buy and sell stocks from almost anywhere. This accessibility has opened doors for many, including nonresidents in the US, to begin investing and earning profits. However, this convenience also brings with it a responsibility to understand tax obligations. If you are a nonresident in the US and earning profits through platforms like Robinhood, it is essential to understand how investment income is taxed by the Internal Revenue Service. In particular, you should be aware that if you are investing in US-based stocks or properties, you are likely subject to tax on your gains.
Many international students, exchange visitors, researchers, and temporary workers on F, J, M, or Q visas have already started reporting income from platforms like Robinhood on their US tax returns. If you are in a similar position and are uncertain about your filing requirements or eligibility for deductions or treaty benefits, this comprehensive guide will walk you through everything you need to know.
The Rise of Accessible Investing
In January 2021, the GameStop short squeeze orchestrated by retail investors on Reddit made global headlines. This event underscored how ordinary individuals now have unprecedented power to influence stock prices and earn significant profits using simple trading apps. In the aftermath, more users began investing in stock markets, whether for quick profits or long-term financial goals. With access to trading platforms just a few taps away, even nonresidents temporarily staying in the US have joined in. But while earning money through these apps may be easy, understanding and complying with tax laws is not always so straightforward.
Can Nonresidents Legally Earn Investment Income in the US?
Yes, nonresidents are permitted to earn passive investment income while present in the US. Passive income includes earnings that are not effectively connected to the active conduct of a trade or business in the United States. Investments such as stock dividends and capital gains fall under this category. If you are in the US on an F or J visa, you are allowed to earn passive income without it being considered a violation of your visa terms. However, there are important restrictions to consider. Nonresidents are not allowed to engage in active trading or be classified as professional traders, as that may constitute active business activity. This could be interpreted as unauthorized employment or conducting business, which can jeopardize your visa status.
Professional Trading and Visa Compliance
Nonresidents must understand the difference between passive investing and professional trading. Passive investing involves long-term holdings or occasional trades. It is not connected to employment or services performed in exchange for compensation. On the other hand, if you frequently engage in high-volume trades, use advanced trading tools, or rely on stock trading as your primary source of income, the IRS may classify your activity as a trade or business. If this happens, your income may be considered effectively connected with a US trade or business, and you might face a different tax structure. More importantly, this could also lead to non-compliance with the terms of your visa, particularly if you are not authorized to work or engage in business activities.
Overview of Tax Obligations on Investment Income
Whether you are investing in stocks, ETFs, or other financial instruments in the US, it is important to know how your income is taxed. Typically, two main types of investment income are subject to taxation for nonresidents: capital gains and dividends. Capital gains arise when you sell a stock or asset for more than what you paid. For example, if you bought a stock at $50 and sold it at $100, your gain is $50 per share. Dividends, on the other hand, are distributions of profits made by a company to its shareholders. These are usually issued periodically and are also considered taxable income. Nonresidents are typically taxed at a flat rate of 30 percent on both capital gains and dividends, unless a lower rate is available through a tax treaty between your home country and the United States.
The 183-Day Rule and Capital Gains Tax
One key rule to understand in the context of capital gains tax is the 183-day rule. If you are physically present in the US for more than 183 days during a tax year, any capital gains from US sources may be taxed at a rate of 30 percent. This rule is particularly important for nonresidents on extended stays who make large profits on stock trades. However, if your presence in the US is fewer than 183 days, capital gains may not be subject to taxation at all. This distinction makes it essential to track the number of days you spend in the US each year. If your presence crosses the 183-day threshold, you may need to prepare for additional tax liabilities, even if you are still classified as a nonresident alien.
Dividend Income and Withholding Requirements
Dividends paid to nonresident investors by US corporations are subject to a flat 30 percent withholding tax. This tax is usually withheld automatically by the broker or financial institution through which the dividend is issued. This means you may receive only 70 percent of your dividend payout, with the remaining 30 percent sent directly to the IRS. In some cases, tax treaties between your home country and the US can reduce this rate, sometimes to as low as 10 or 15 percent. To take advantage of a reduced rate, you must declare your nonresident status and submit the appropriate documentation to your broker.
Tax Treaty Benefits for Nonresidents
The US has tax treaty agreements with numerous countries around the world. These treaties can provide significant relief for nonresidents by lowering withholding rates or exempting certain types of income altogether. For example, Germany has a tax treaty with the US that allows for a 0 percent capital gains tax rate for nonresident investors, provided the proper documentation is filed. However, treaties vary significantly depending on your country of residence. Not all treaties include provisions for capital gains, and some may only reduce the dividend tax rate. It is crucial to review the terms of your home country’s treaty with the US before investing, and to file any required forms in advance to ensure you receive the correct tax treatment.
Timing of Tax Liability
Tax liability is generally determined based on when the income is issued, not when it is received. For example, if a company declares a dividend in December 2024 but you do not receive the payment until January 2025, the dividend is still considered taxable in 2024. This rule also applies to capital gains and other forms of investment income. Therefore, it is important to keep accurate records of transaction dates and payment issuance, particularly when preparing your annual tax return. Misreporting income in the wrong tax year can result in delays, penalties, or audits.
Common Misconceptions About Trading Income
Many nonresidents believe that because they are not US citizens or green card holders, they are exempt from US tax on investment income. This is incorrect. The IRS requires that any person who earns income from US sources, including from stock trading or dividends, must report it and pay the appropriate tax, unless a treaty exception applies. Another misconception is that small profits do not need to be reported. In reality, all income, regardless of amount, should be disclosed on your tax return. Failing to do so may be considered tax evasion and can have serious legal consequences, including fines and potential immigration issues.
The Importance of Proper Documentation
One of the most important things you can do as a nonresident investor is to maintain proper documentation of all your transactions and tax forms. This includes keeping records of stock purchases and sales, dividend income, and any forms issued by your broker, such as the 1099 series or 1042-S. Accurate documentation will not only help you prepare a compliant tax return but also support your claims if you are audited. Filing the correct forms, such as Form 1040NR and Form W-8BEN, is essential for compliance and for claiming any benefits you may be entitled to under a tax treaty. Keeping these documents organized and up to date is a key step in avoiding future tax problems.
Tax Forms You May Receive from Robinhood or Other Brokers
As a nonresident earning investment income through platforms like Robinhood, you may receive several tax forms each year. The most common forms include the 1099 and 1042-S. The type of form you receive depends on your residency status as recognized by the IRS and the type of income you have earned. Form 1099 is typically issued to U.S. persons, including residents for tax purposes, and reports various types of income such as interest, dividends, and capital gains. However, if you are classified as a nonresident alien, you should not receive a 1099 form. Instead, you should receive Form 1042-S, which reports U.S.-sourced income paid to foreign persons and includes any tax that was withheld on that income.
When Nonresidents Receive Form 1042-S
Form 1042-S is particularly important for nonresidents who earn dividends, interest, or other types of U.S.-sourced income subject to withholding. This form will indicate the gross income earned, the amount of U.S. tax withheld, and the nature of the income, such as dividends or capital gains. It is critical to ensure that you receive this form and not a 1099 if you are still classified as a nonresident alien. Receiving the wrong form may indicate that your broker has misclassified your tax residency, which could result in incorrect withholding or even penalties. If you believe you should have received a 1042-S but instead received a 1099, contact your broker immediately to correct your status and reissue the appropriate form.
Form W-8BEN and Its Role in Claiming Tax Treaty Benefits
To benefit from reduced tax rates under an applicable tax treaty, nonresidents must submit Form W-8BEN to their broker. This form certifies that you are a nonresident of the U.S. and eligible for tax treaty benefits. It includes information such as your name, address, and foreign taxpayer identification number. Once submitted, the broker uses the form to apply the correct withholding rate to your income. It is your responsibility to ensure that this form is accurate and updated. Brokers typically request that this form be renewed every three years. Failure to submit or update Form W-8BEN could result in automatic withholding at the default 30 percent rate, even if your home country’s treaty provides for a lower rate.
Filing Requirements for Nonresidents
If you earn any U.S.-sourced income during the year, including from trading or dividends, you are required to file a U.S. tax return, specifically Form 1040NR. This form is used by nonresident aliens to report their income and claim any deductions or credits they may be eligible for. Even if tax was already withheld by your broker, you may still need to file a return to report the income, confirm your withholding, and claim a refund if too much tax was withheld. You should also attach any Forms 1042-S received, as these serve as proof of the income earned and the tax paid. In some cases, you may also need to attach Schedule NEC (Not Effectively Connected Income) to separately report investment income not connected with a U.S. trade or business.
Reporting Capital Gains on Form 1040NR
Capital gains that are not effectively connected to a U.S. trade or business and are earned by a nonresident who is present in the U.S. for less than 183 days are generally exempt from U.S. taxation. However, you may still need to report these gains on your tax return, especially if you are also reporting other income or claiming a refund. If you were present in the U.S. for more than 183 days during the year, your capital gains may be subject to a 30 percent tax. This is reported on Schedule NEC and then carried over to Form 1040NR. It is important to consult your specific tax treaty to determine whether your gains are exempt and to correctly apply the treaty provisions to your return.
When and How to File Your Tax Return
The deadline for nonresidents to file their U.S. tax return is typically June 15 of the following year if they are not earning wages subject to withholding. If you are receiving wages, the deadline is April 15. You can file your return electronically using approved software or mail a paper return to the appropriate IRS address. It is strongly recommended that you file on time, as late returns can result in penalties and interest, even if you are due a refund. If you cannot file by the deadline, you can request an automatic extension using Form 4868, which extends your deadline to October 15. However, this is only an extension to file, not to pay. Any tax due must still be paid by the original deadline.
Consequences of Not Filing Your Return
Failing to file a tax return as a nonresident can lead to serious consequences. If tax was owed and not paid, the IRS can assess penalties and interest on the unpaid balance. Even if no tax was owed, failing to file may jeopardize your immigration status or ability to claim future refunds. For example, if you later apply for a U.S. visa or green card, immigration authorities may request your prior tax filings. Gaps or inconsistencies in your filing history could raise red flags and delay or deny your application. In addition, failure to file Form W-8BEN or claim a tax treaty exemption may result in automatic 30 percent withholding on all future income.
Record-Keeping Requirements for Nonresident Investors
As a nonresident investor, it is essential to maintain accurate records of all your transactions, including trade confirmations, dividend payments, and any tax forms received from your broker. You should keep copies of all filed tax returns and supporting documentation for at least three years, and preferably up to seven years in case of an audit. These records may be requested by the IRS to substantiate your reported income and any claimed deductions or treaty benefits. Good record-keeping also helps ensure you can reconcile the information reported by your broker with your calculations and avoid errors in your filings.
Choosing a Broker That Supports Nonresident Investors
Not all brokerage platforms are set up to handle nonresident accounts correctly. Some brokers, especially newer fintech platforms, may not have the infrastructure in place to classify nonresident clients properly, issue the correct tax forms, or apply tax treaty benefits. Before opening an account, make sure the broker supports nonresident investors and complies with IRS regulations. Ask if they provide Form 1042-S, accept Form W-8BEN, and withhold tax at the treaty rate if applicable. Using a broker that is unfamiliar with nonresident tax rules can lead to incorrect withholding, reporting errors, and complications when filing your return.
Using Software or a Tax Professional to File
Filing taxes as a nonresident can be complex, particularly if you have multiple sources of income or are relying on treaty benefits. While it is possible to file your return yourself, using tax software designed for nonresidents or working with a qualified tax professional can help reduce errors and ensure compliance. Specialized services can help you determine your residency status, generate the correct forms, and calculate your tax liability based on your income and treaty provisions. They can also assist with audits or notices from the IRS if needed. Although this may involve a fee, it can save you time and reduce the risk of costly mistakes.
Determining Your Tax Residency Status
Before you file your tax return or even determine your reporting requirements, it is essential to confirm your residency status for tax purposes. The IRS uses the Substantial Presence Test to determine whether you are considered a resident or nonresident alien. This test evaluates the number of days you have been physically present in the U.S. over three years. Generally, if you were present in the U.S. for 183 days or more during the current tax year, or if the weighted total from the last three years adds up to 183 days or more, you may be considered a resident for tax purposes. However, certain individuals—such as F, J, M, or Q visa holders—are often exempt from counting days for a specific period. For example, international students on F-1 visas are usually considered nonresidents for the first five calendar years in the U.S. It is important to correctly calculate your status, as this directly affects your filing obligations and the forms you must use.
Tax Implications for Dual-Status Aliens
In some cases, you may be considered a dual-status alien if you were both a nonresident and a resident during different parts of the same tax year. For example, if you transitioned from a nonresident visa category to a resident visa or obtained a green card during the year, your tax obligations will be split accordingly. For the nonresident portion of the year, you will file a 1040NR and report only U.S.-sourced income. For the resident portion, you must file a 1040 and report worldwide income. The two returns are usually filed together with a statement that explains the transition. Dual-status filings can be complicated and often require additional documentation, so consulting a tax professional is recommended.
Tax Treatment of Cryptocurrency for Nonresidents
As more investors diversify their portfolios, some nonresidents have turned to cryptocurrency platforms in addition to traditional stock trading apps like Robinhood. The IRS considers cryptocurrency to be property, not currency, meaning that crypto transactions are subject to capital gains tax. If you are a nonresident earning crypto gains in the U.S., those gains may be taxable depending on where the transactions occur and whether they are considered U.S.-sourced. This area of tax law is still evolving, and the treatment of crypto income for nonresidents may depend on factors such as where the exchange is located, your residency status, and how the transactions are executed. Unlike dividends, crypto income is not typically subject to withholding, which means you may be responsible for calculating and paying tax when you file your return.
Avoiding Classification as a Trader in Securities
Nonresidents must take care to avoid being classified as traders in securities rather than investors. The distinction lies in the frequency and purpose of trading activity. Investors typically buy and sell securities for long-term gain, while traders seek to profit from short-term price movements through frequent, substantial transactions. Being classified as a trader in securities may result in the IRS determining that you are engaged in a U.S. trade or business, which can change the way your income is taxed. It could also raise questions about your compliance with visa regulations if your visa does not permit employment or business activities. Keeping your activity at an investment level—rather than a business level—is the safest approach for nonresidents.
Impact of Treaty Tie-Breaker Rules
If you meet the Substantial Presence Test but still qualify for tax treaty benefits under your home country’s agreement with the U.S., you may be able to claim nonresident status by applying treaty tie-breaker rules. These rules help resolve cases of dual residency, where both countries claim you as a tax resident. To apply these rules, you must file Form 8833 along with Form 1040NR and a statement explaining how the treaty applies to your situation. The IRS may scrutinize such claims, and incorrect use of the treaty could result in penalties. It is advisable to consult a tax professional when invoking treaty tie-breaker provisions, especially in complex cases involving multiple sources of income or cross-border tax obligations.
Understanding State Tax Obligations
In addition to federal tax obligations, nonresidents may also be subject to state income tax. While not all states impose income tax, those that do may have different definitions of residency and income sourcing. For example, California has a particularly broad definition of tax residency and may claim taxation rights over your income if you spend significant time there, even if you are a nonresident for federal purposes. If you earn dividends or capital gains through an app while living in a state with income tax, you may be required to file a state return as well. States typically do not offer the same treaty benefits as the federal government, so even if your treaty exempts you from federal tax on certain income, you may still owe state tax. It is important to review the rules of your resident state and confirm whether you must file a separate return.
What Happens If You Leave the US Mid-Year?
If you depart the U.S. during the tax year, your obligations do not disappear. You are still required to report and file for the portion of the year you were present. Depending on the timing and type of income earned, you may still need to file Form 1040NR and report your U.S.-sourced investment income, even after you have returned to your home country. In some cases, you may also be subject to a departure tax clearance process with the IRS, especially if you are terminating long-term residency or green card status. It is essential to keep your records in order and maintain access to the necessary documents, even after you leave the U.S., so you can fulfill any tax reporting duties from abroad.
Foreign Tax Credit and Double Taxation Relief
If your home country also taxes investment income, you may be at risk of being taxed twice—once by the U.S. and once by your country of residence. To avoid double taxation, many countries allow residents to claim a foreign tax credit for taxes paid to the U.S. Alternatively, tax treaties often include provisions that relieve double taxation through exemptions or credits. However, the process for claiming foreign tax credits varies widely depending on the tax laws of your home country. You will likely need to provide proof of taxes paid in the U.S., such as a copy of Form 1042-S or your 1040NR return. Coordinating your U.S. and home country filings is important to ensure you do not overpay.
IRS Audits and Notices for Nonresident Investors
Although less common, nonresidents are not immune from IRS scrutiny. If discrepancies are found in your tax filings—such as mismatched income reports, incorrect treaty claims, or failure to report income—you may receive a notice or audit request from the IRS. In some cases, the IRS may question your residency status, treaty claims, or the sourcing of your income. It is important to respond promptly and provide all requested documentation. Keeping well-organized records and filing complete, accurate returns can help you avoid issues and resolve any questions quickly. If you receive an audit notice, it may be beneficial to consult a tax advisor experienced in nonresident taxation.
Filing a Return with Zero or Negative Income
Even if you didn’t make any profits or your investments resulted in a loss, it may still be a good idea to file a U.S. tax return. Filing a return when you have zero or negative income can help establish your tax compliance history and may be required if you plan to apply for future immigration benefits, such as a visa extension or green card. Additionally, filing may be necessary to claim a refund of any taxes that were withheld unnecessarily. For example, if your broker withheld tax on capital gains that are not subject to tax due to a treaty, you must file Form 1040NR to reclaim that amount. Filing a return, even with no income, ensures your tax records are complete and accurate.
What to Do If You Made an Error on a Previous Return
Mistakes happen. If you realize you made an error on a previously filed tax return—such as misreporting income, claiming an incorrect treaty benefit, or failing to include required forms—you should amend your return. To do this, nonresidents must file Form 1040X along with a corrected Form 1040NR. Clearly explain the reason for the amendment and provide any supporting documents. You generally have three years from the original filing deadline to amend a return and claim a refund. It is always better to correct errors proactively than to wait for the IRS to discover them, which could lead to penalties or audits.
Applying for an ITIN if You Don’t Qualify for a Social Security Number
If you are a nonresident who does not have and is not eligible for a Social Security Number, you will need an Individual Taxpayer Identification Number (ITIN) to file a U.S. tax return. You can apply for an ITIN using Form W-7, which must be submitted with your tax return unless you qualify for an exception. You will also need to provide documentation that verifies your identity and foreign status, such as a certified copy of your passport. Some tax software and preparers can help you submit this application, or you can work with a Certified Acceptance Agent. An ITIN is valid for three years if not used and must be renewed if it expires. Having an ITIN is essential for nonresidents who need to report investment income, claim treaty benefits, or fulfill other tax obligations.
Avoiding Common Pitfalls in Nonresident Tax Reporting
Nonresidents frequently make avoidable mistakes when reporting their U.S. investment income. Common pitfalls include using the wrong tax form (such as filing a Form 1040 instead of 1040NR), failing to file Form W-8BEN to claim treaty benefits, incorrectly reporting dividends or capital gains, and omitting foreign addresses or ITINs. Another frequent issue is not recognizing the difference between state and federal tax obligations. Using tax software not designed for nonresidents can also lead to filing errors, since many mainstream platforms do not support 1040NR filings or treaty-based claims. To avoid these mistakes, take time to understand your obligations, use tools or services made specifically for nonresidents, and double-check all information before submission.
The Role of Foreign Financial Accounts and FBAR
If you maintain financial accounts outside the U.S., including investment or trading accounts in your home country, you may have additional reporting obligations. The Foreign Bank and Financial Accounts Report (FBAR) must be filed by anyone who has signature authority over or a financial interest in foreign accounts totaling more than $10,000 at any time during the year. Although nonresidents are not typically required to file FBAR unless they meet certain thresholds and have closer connections to the U.S., it’s important to determine whether you qualify. Failure to file an FBAR when required can result in significant penalties. If your primary investments remain in U.S. platforms like Robinhood, FBAR is less likely to apply, but you should evaluate your broader financial footprint.
Investment Strategies That Minimize Tax Exposure
As a nonresident, you may want to structure your investments in a way that minimizes your U.S. tax exposure. One approach is to focus on long-term capital appreciation rather than frequent short-term trades, which can lead to taxable gains. Another strategy is to invest in U.S. stocks that do not pay dividends, thereby avoiding dividend withholding. You can also consider mutual funds or ETFs based outside the U.S. that are not classified as U.S.-sourced income. However, these options must be evaluated carefully, especially in light of Passive Foreign Investment Company (PFIC) rules, which apply to U.S. persons investing in certain foreign funds. While these rules may not affect nonresidents, they can be triggered if you become a resident later. Proper planning is key to optimizing your portfolio while staying compliant.
Planning for a Future Status Change
Many nonresidents eventually become residents for tax purposes, either by staying longer in the U.S., adjusting visa status, or obtaining permanent residency. If you expect a future change in status, it’s important to plan your investment strategy and tax filings accordingly. For example, if you anticipate becoming a resident next year, you may want to realize capital gains while still classified as a nonresident to benefit from possible tax exemptions. You should also prepare to report worldwide income once you become a resident. This includes any foreign accounts, trusts, or business interests you hold abroad. Being proactive about this transition can help you avoid unexpected liabilities or penalties when your tax residency changes.
Getting Help from a Tax Professional
Because nonresident tax rules are complex and often vary depending on treaties, visa categories, income sources, and residency status, working with a tax professional experienced in nonresident issues can be a valuable investment. A qualified preparer can help you assess your status, determine your filing requirements, maximize treaty benefits, and minimize your overall tax burden. They can also represent you before the IRS in the event of an audit or dispute. Look for professionals who specialize in international or expatriate taxation, and confirm they have experience working with nonresident investors. This guidance can ensure accuracy and peace of mind.
Staying Informed as Regulations Evolve
U.S. tax law is constantly evolving, particularly in areas involving international income, digital assets, and reporting requirements. Nonresidents should stay informed about changes that could impact their investment strategies or filing obligations. For example, recent IRS guidance on digital assets has clarified how crypto income should be reported, but additional rules may be introduced. Similarly, new treaty negotiations or legislative updates could modify withholding rates or eligibility criteria for exemptions. Following reputable tax resources, subscribing to updates, or working with professionals who monitor these changes can help ensure ongoing compliance and financial efficiency.
Final Thoughts
Trading on platforms like Robinhood can be an effective way for nonresidents to build wealth and gain exposure to U.S. financial markets. However, with the potential for profits comes the obligation to understand and fulfill your tax responsibilities. From confirming your residency status and submitting the right forms, to claiming treaty benefits and reporting income correctly, every step matters. Staying organized, informed, and compliant not only protects you from penalties but also positions you for a strong financial future regardless of whether you remain in the U.S. or return home.