Passive Investment Income

A Passive investment is a type of investment income that is not directly related to the conduct of an active trade or business. Examples include investments in stocks, mutual funds, and commodities held through U.S. dollar-denominated brokerage firms or other financial institutions.

Foreign individuals may earn several types of passive income when they invest in the U.S., including dividends and capital gains. Let’s understand the U.S. taxes on each type of income derived from passive investment.

U.S. Taxation of Dividend Income

When foreign investors invest in U.S. stocks, they generally receive dividend income. Dividends are payments made by companies to their shareholders out of profits.  

However, when these dividends are paid to foreign shareholders, they are generally subject to a 30% withholding tax in the U.S.

However, the rate may be reduced if a tax treaty between the U.S. and the individual’s home country applies.

U.S. Taxation of Capital Gains

Passive investment income derived from the sale of stocks and other investment property may constitute capital gains. Such capital gains are taxed under the special rule, which is as follows:

• A non-resident alien who is in the U.S. for less than 183 days in a tax year is generally not subject to U.S. tax on U.S.-source capital gains (except in the case of U.S. real property interests).
• If the non-resident alien is present in the U.S. for 183 days or more in a tax year, they are likely taxed at a 30% flat rate on U.S.-source capital gains.

Example: An Indian investor who has never visited the United States sells U.S. stocks through a U.S. brokerage and realizes a $50,000 gain. Since the investor is a non-resident alien and has not been in the U.S. during the year (well under 183 days), the capital gain is not taxable in the U.S.