If you are a non-resident alien (NRA) who earns capital gains from selling assets connected to the United States, it is crucial to understand how the U.S. tax system treats these transactions. Whether you're selling real estate, stocks, or business interests located in the U.S., the capital gains tax implications can vary significantly depending on your residency status, the type of asset, and whether tax treaties apply. Failing to report these gains properly may lead to penalties, withholding issues, or even denial of future U.S. entry.
Unlike U.S. citizens or resident aliens who are taxed on worldwide income, non-residents are taxed only on certain types of U.S.-source income. In most cases, capital gains are not taxable to non-residents unless they are connected to U.S. real property interests (USRPI) or are part of a business or trade conducted within the U.S. However, the rules are complex, and in some cases, withholding may still apply at the time of sale.
In this comprehensive guide, we'll break down everything you need to know as a non-resident earning capital gains from U.S. sources, including taxability, relevant forms (like Form 1040-NR and Form 8288), real estate withholding (FIRPTA), and tax treaty considerations. By the end of this article, you'll be equipped with actionable steps to file correctly and avoid common tax pitfalls.
Who is a U.S. Non-Resident for Tax Purposes?
A non-resident alien is someone who:
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Is not a U.S. citizen
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Does not hold a U.S. Green Card
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Fails the Substantial Presence Test (less than 183 days in the U.S. over a three-year lookback period)
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May be considered non-resident under a tax treaty
As a non-resident, you are only taxed on U.S.-source income, and whether capital gains are taxed depends on the asset and connection to the U.S.
Are Capital Gains Taxable for Non-Residents?
The IRS generally does not tax capital gains for non-residents unless:
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The gains are effectively connected income (ECI) with a U.S. trade or business
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The asset sold is a U.S. real property interest (USRPI) such as real estate or shares in U.S. real estate holding corporations
For example:
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Selling U.S. stocks: Not taxable for most non-residents (exceptions may apply for traders)
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Selling U.S. real estate: Taxable under FIRPTA rules
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Selling business assets: Taxable if the business is U.S.-based and the gain is ECI
Key Terms to Understand
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ECI (Effectively Connected Income): Income connected to a U.S. business; subject to tax.
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FDAP Income: Passive income like interest or royalties; taxed differently.
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USRPI: Includes U.S. real estate, buildings, land, and shares in certain U.S. real estate holding companies.
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FIRPTA (Foreign Investment in Real Property Tax Act): Requires withholding on foreign persons selling U.S. real estate.
Capital Gains on U.S. Real Estate
When a non-resident sells U.S. real estate, the transaction is subject to FIRPTA. Here’s what you need to know:
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Withholding Requirement: Buyer must withhold 15% of the gross sale price and remit it to the IRS using Form 8288.
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Reporting Requirement: The non-resident must file Form 1040-NR and potentially Form 8288-A to claim a refund if tax liability is less than withheld.
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Reduced Withholding Option: Sellers may file Form 8288-B to apply for a withholding certificate if they believe the 15% is excessive.
Capital Gains on U.S. Stocks
In most cases, non-residents are not subject to capital gains tax on the sale of U.S. stocks unless:
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The trading activity constitutes a U.S. business
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The individual is present in the U.S. for 183 days or more during the tax year (in which case a 30% flat tax may apply to gains)
Non-residents generally do not receive a Form 1099-B from U.S. brokers and are not required to report capital gains from publicly traded securities on Form 1040-NR.
Filing Forms for Capital Gains
Form 1040-NR
Used by non-residents to report all U.S.-source income, including capital gains that are taxable (e.g., from real estate sales).
Form 8288 and 8288-A
Used by the buyer or transferee of U.S. real estate to report and remit FIRPTA withholding to the IRS.
Form 8288-B
Filed by the foreign seller to request a reduction or elimination of the FIRPTA withholding amount. Requires IRS approval before the sale closes.
Form W-8BEN
Submitted to brokers or real estate agents to certify non-resident status and potentially claim treaty benefits.
Common Mistakes by Non-Residents
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Assuming no tax liability for U.S. real estate sales
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Failing to file Form 8288-B before sale closes
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Not filing Form 1040-NR to claim excess FIRPTA withholding
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Misunderstanding treaty protections or their limitations
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Failing to obtain an ITIN (Individual Taxpayer Identification Number) before filing
Tax Treaties and Capital Gains
Some countries have tax treaties with the U.S. that may affect how capital gains are taxed. For example:
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Residents of Canada, UK, Germany, and France may have reduced rates or exemptions for certain types of gains.
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Treaty benefits are not automatic—you must file Form W-8BEN and sometimes include Form 8833 to disclose treaty position.
Always consult the specific treaty text or a tax professional to understand your rights under the agreement.
Timeline and Deadlines
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FIRPTA Withholding (Form 8288): Due 20 days after transfer
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Capital Gains Tax Return (Form 1040-NR): Due by April 15 of the year following the sale (or June 15 if no U.S. income outside FIRPTA)
Example Scenarios
Scenario 1: Real Estate Sale by Non-Resident
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Foreign investor sells a condo in Miami for $500,000.
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Buyer withholds $75,000 (15%) and files Form 8288.
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Seller files 1040-NR to report actual gain and claims refund for over-withholding.
Scenario 2: Stock Sale by Non-Resident
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Non-resident sells $100,000 of Apple stock.
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No U.S. tax applies unless present in the U.S. >183 days or gain is connected to a U.S. business.
Tips for a Smooth Tax Process
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Apply for an ITIN early if you don’t have one.
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File Form 8288-B before closing a U.S. property sale to reduce withholding.
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Keep copies of all sales documents, including HUD-1 or closing disclosure.
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Maintain a record of acquisition costs, improvements, and selling expenses.
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Consult a cross-border tax expert if selling high-value assets.
FAQ – Capital Gains for Non-Residents
Q. Are capital gains always tax-free for non-residents?
A. No. Capital gains from U.S. real estate or ECI are taxable. Others, like public stocks, are often tax-free.
Q. Do I need to file Form 1040-NR if I sold U.S. property?
A. Yes. Even if the tax was withheld, you must file 1040-NR to report the sale and claim a refund if due.
Q. Can I avoid the 15% FIRPTA withholding?
A. Possibly. File Form 8288-B before closing to request a reduced or zero withholding certificate.
Q. Is stock trading considered a U.S. business?
A. Not usually. Occasional trades don’t count. Frequent, professional trading might.
Q. What happens if I don't file tax returns?
A. You may lose refunds, face penalties, or create issues when re-entering the U.S.
Q. Do tax treaties help with capital gains?
A. Sometimes. Each treaty is different. Check if your country has favorable terms.
Q. Can I file 1040-NR electronically?
A. Usually no. Most non-residents must file by mail, especially with real estate involved.
Q. How do I get an ITIN if I don’t live in the U.S.?
A. Submit Form W-7 with your 1040-NR and a certified passport copy or use an IRS Acceptance Agent.
Tags:
us capital gains, nonresident tax, FIRPTA, 1040nr, real estate tax, stock gains tax, form 8288, withholding tax, IRS forms, foreign investor tax
