The U.S. market is one of the foundations of the worlds economy. The exchanges in America see regular buying and selling of company shares, with a total market value of $35.5 trillion as of June 2020. But can you trade U.S. stocks if you’re not a U.S. Citizen?
The answer is yes! There is no citizenship requirements for owning American stocks, as long as you have a brokerage account which deals in international stocks.
While U.S. investment securities are regulated by U.S. law, there are no specific rules that forbid individuals who are not U.S. citizens from buying and selling U.S. securities. However, for a Non-U.S. citizen, they might want to check with a financial advisor regarding taxation of any profits.
Are there any Extra Hoops Non-U.S. Citizens need to Jump Through to Trade on U.S. Stock Exchanges?
There are a few extra hurdles that non-U.S. citizens have to get over when trading U.S. securities. Foreign shareholders in U.S. companies could be subject to an array of U.S. laws, but this is nothing to be afraid of, the laws in question are only to protect the interest the U.S. has in the market.
An international stockbroker can help non-U.S. investors jump these hurdles, to ensure they are complying with any regulation that the U.S. Government imposes on the securities market.
Some of the hurdles are…
W-8BEN Tax Form
This common tax form is required for foreign investors. Many international investors choose to work with online brokers, which makes submitting this form much easier.
This tax form expires 3 years after you sign it, and your broker should always remind you to renew your information.
This form clarifies whether you need to pay tax on your profits in the U.S. or whether you come from an exempt country, whereby you would pay tax to your resident Government.
If you fail to file a W-8BEN form, or are not deemed exempt, your brokerage account will withhold 30% of all interest and dividends gained from your investments.
Patriot Act (2001) – New Regulation
The goal of the Patriot Act is to stop terrorist organisations from financing illegal operations through American markets.
The U.S. Government has gone to great lengths to ensure that members of terrorist organisations, or organisations linked with terrorist activity are not able to finance their operations through the U.S. stock markets.
This means all investors will need to verify their identity using a form a Government issued photo ID, and a bank statement or utility bill as prove of address.
Part of this act also requires stockbrokers to report any suspicious account activity to the U.S. Government. So there are some things you should be aware of:
- Only use your own personal bank account to fund your investment account.
- If you move house, renew your W-8BEN form and update your proof of address.
- Stay up to date with your brokers legal agreements.
This regulation obviously won’t have an effect on the majority of investors. It is safe to say that if you’re not involved in any illegal activities, or any activities that the U.S. Government may find offensive, you should be well within your rights to trade U.S. securities.
Opening a Brokerage Account for Non-U.S. Citizens
An international broker can help investors who are new to the U.S. markets manage their investments and get through the hurdles that they face. Complying with the regulations in place for non-U.S. citizens is the most important part of investing in the U.S. exchanges.
For example, if you are a UK citizen, you can open a brokerage account with Barclays or Hargreaves Lansdown to trade U.S. stocks. Examples in other countries are CIMB Bank in Malaysia, or Indbank in India.
International Online Brokers
I think in the 21st century, online is the way to go. There are plenty international online brokers that serve non-U.S. citizens, which allow you to invest in the U.S. markets.
- Interactive Brokers
- Trading 212
- TD Ameritrade
Obviously I don’t have to tell you that some of these brokers are better than others, the free online broker market is getting crowded and it is sometimes hard to see the diamond in the rough.
Brokers like eToro, Trading 212, and TD Ameritrade are among the most popular online brokers in the world. I use Trading 212 and eToro myself. However, people in some countries might not be able to open accounts from these two brokers because of legal requirements.
Unfortunately, some online brokers like M1 Finance and Webull do not offer accounts to non-U.S. citizens. M1 Finance is looking to make this available in the near future, but thankfully there are other options.
Tax Implications of U.S. Stock Investing for Non-U.S. Citizens
We’ve already mentioned the W-8BEN form that may make you exempt from U.S. tax on investment gains. But if you neglect to complete a W-8BEN form, 30% of your income generated from your investments will be held by your broker as a capital gains tax payment.
There are some exemptions to this rule. If you don’t file a W-8BEN form, but your country of residence is involved in a treaty with the U.S. Government that grants investors lower tax rates, the arranged rate will be deducted from your profit.
International tax rules are very complex, which is why every investing blog will advise you to invest through an international broker, whether that be a bank or online account. There knowledge of international tax law is much greater than mine, and will help you avoid massive mistakes that could end in huge tax bills.
Most investors that complete a W-8BEN form will only be liable to pay tax in their country of residence. For the UK this is called capital gains tax at either 10% or 20% based on your level of income, there is also a dividend tax on dividend earnings after your first £2,000.
Tax for Resident Aliens
Resident aliens, meaning a non-U.S. citizen who is living in the U.S. has to comply with regular U.S. tax regulations. The IRS imposes tax on worldwide income from all sources. Therefore, resident aliens are taxed the equivalent of U.S. citizens.
Not being a U.S. citizen shouldn’t stop you from investing in U.S. stocks. U.S. companies are some of the most exciting companies to invest in, with the potential of huge gains to be made.
Factors when Choosing an International Broker
Choosing an international broker might sound a bit iffy, but it’s not as scary as it sounds. The main 3 aspects when choosing an international broker are clarified below.
It might sound silly, but you want to make sure the broker you choose has access to the securities you wish to trade. For example, the brokerage firm may offer access to the top markets, such as the London Stock Exchange, NYSE, and the NASDAQ, but not the Asian markets in China or Japan.
It would be best to look for a broker that offers all U.S. stocks, as well as mutual funds, ETFs, forex, futures and options.
What is the brokers spread? The minimum account balance? And is there any fee per trade?
This point being the most important, you want a broker who is either assured by a regulatory body, or by the Government in the company’s registered county.
There are a lot of Governing bodies that regulate online brokers, and if you stick to one of the bigger names you’ll most likely be fine. But don’t hop onboard with a broker unless you’re sure you are protected against fraud and other illegal activities.
Information about the security of a broker is usually available on their website, but you should also look to your peers for reviews and assurances that they are a law abiding company.