Investor taxes: who pays and how — the Interactive Brokers example

A foreign broker does not pay your home-country taxes for you. It withholds part itself; the rest is your duty. Here is what is what, using Interactive Brokers as the example.

Who pays at all

You pay tax on investments — in the country where you are a tax resident. Usually that is where you spent more than half the year (183 days), though some countries have their own tests: centre of vital interests, permanent home, family.

What matters is neither citizenship nor the broker's country, but residency. If you moved, the rules changed in the year you became a resident of the new country.

What is taxed

• Dividends — payouts from companies and funds.
• Interest — on bonds and on cash in the account.
• Gains on sale — sale price minus purchase price and fees. Until a security is sold there is no gain for tax purposes.
• In some countries — also currency differences and “deemed” income on accumulating funds, even if nothing reached your account.

What the broker withholds itself

Interactive Brokers is not a tax agent in your country. But it does one thing itself: it withholds US tax on dividends of US companies — before the money reaches your account.

• The base rate is 30%.
• If your country has a tax treaty with the US and you completed form W-8BEN when opening the account, the rate is lower — most often 15%.
• The W-8BEN must be re-certified every three years: the broker reminds you. Miss it and the 30% rate returns.

On gains from selling US stocks it generally withholds nothing from non-US residents: that tax you pay only at home.

What is left to you

1. Declare the year's income in your country: dividends, interest, gains on sales.
2. Credit the tax withheld in the US. If the countries have a treaty, what was paid in the US reduces the tax at home — so the same income is not taxed twice. The credit cannot exceed what your own tax would be.
3. Pay the difference if your country's rate is higher than what was withheld.
4. In some countries — report the account itself: that it exists and how much is in it. This is a separate duty unrelated to income.

A worked example

An illustrative case: your country's rate is 15% on both dividends and gains; a treaty with the US exists.

Without a US treaty the same dividends lose 30% — $12. At home no more than your own $6 is credited, and the remaining $6 is simply lost. European funds exist for exactly such cases — see the UCITS guide.

Which reports to take from Interactive Brokers

Everything is in the client portal, under reports and tax documents.

• The annual Activity Statement — the main document: all trades, dividends, interest, fees and taxes withheld for the year. Download it for the calendar year.
• The dividend report — every payout with its date, amount and tax withheld.
• Form 1042-S — the official statement of US-source income and the tax withheld on it. It appears in spring of the following year; it supports your claim for the credit.

How to calculate correctly

• Conversion to your currency. Usually each transaction is converted at the official rate on its date: a purchase on the purchase date, a sale on the sale date. Because of this tax can arise even where there is no gain in dollars.
• Order of sale. If you bought in parts, the earliest purchases are usually treated as sold first.
• Losses. In many countries a loss on some trades reduces gains on others, and the remainder carries forward — but only if the loss was declared.
• Broker fees usually reduce the gain.

The yearly routine

• In January download the annual Activity Statement and the dividend report.
• In spring download form 1042-S.
• Convert dividends, interest and trades into your currency.
• File on time and claim the credit for US tax.
• Keep the reports: they may be requested years later.
• Check whether the W-8BEN is due for re-certification.

Common mistakes

• “The broker has already withheld everything.” Only US tax on dividends is withheld. Gains on sales and interest are on you.
• “I did not withdraw money, so there is no income.” Tax arises at the moment of sale or payout, not withdrawal to a card.
• “Nobody will learn about a foreign account.” Financial institutions in most countries automatically pass data on foreigners' accounts to tax authorities.
• Not declaring a losing year. Then the loss cannot be offset later.
• Forgetting about a move. In the year you change countries, check residency and rules separately.

This article is educational and is not tax or investment advice or an advertisement for a broker. The rates in the example are illustrative. Tax rules differ by country and change — check them in your country.