[Non resident] Fidelity withheld taxes on total proceeds from stock/ETF sales

[tbudd]

I'm a non-resident alien (NRA) with a brokerage account with Fidelity. Recently I did some stock and ETF sales (in March 2023) and to my surprise got taxes withheld at the max rate

Now, as an NRA, I'm not supposed to be taxed on capital gains/stock sales at all, as per the following section from this IRS article, unless I've resided in the US for 183 days.

I'm finding it hard to explain my situation to Fidelity or understand their dumb move.

"Capital Gains

With certain exceptions, capital gains income is not usually taxable to a nonresident whose days of presence in the United States do not equal or exceed 183 days in a calendar year. However, refer to The Taxation of Capital Gains Of Nonresident Alien Students, Scholars and Employees of Foreign Gover... for an exception to the general rule. If the capital gains income is taxable it is not usually subject to withholding. If the capital gains income is taxable, the beneficial owner of the capital gains income is required to report the gains on Form 1040-NR, U.S. Nonresident Alien Income Tax Return. The beneficial owner of the income may claim the benefit of the tax treaty article which deals with "Income from Gains" on his Form 1040-NR. (See IRS Publication 515 and Publication 901)."

What is my recourse to recover the taxes?

Please advise.

[ErnieS0 · Accepted solution]

You can’t recover income tax withholding by yourself. Fidelity would have to recover the money.

If Fidelity is unwilling to do this, the withholding will be added to the rest of your withholding when you file a 2023 income tax return. Any excess withholding will be issued to you as a refund.

[tbudd]

Thanks @ErnieS0 for the response!

I had a word with Fidelity, and it seems this backup withholding could be reverted if additional documentation is provided in W-8BEN in part II (Claim of tax treaty benefits(for chapter 3 purposes only) ).

Now, I'm having a really hard time figuring out what kind of income, technically speaking, the sale of stocks/etfs is so I can fill in the details sought in line 10 (screenshot attached). I referred to the India-US treaty document, but was left confused about the appropriate article and paragraph to choose. Any pointers on that?

[ErnieS0]

You can file summaries of tax treaties at United States Income Tax Treaties - A to Z.

Go to the Technical Explanation your country. Search “withholding” to find the withholding rate. Use the Article number and paragraph (if applicable).

[tbudd]

Thanks again!

I did review the tech explanation for India in the India-US treaty, and it seems to me that the applicable treaty article and paragraph would be 14 ("residence") and 1 respectively.

However, on reading the W8-BEN instructions (please see below), I am unable to map the income through the stock sales transactions that could be claimed for withholding elimination. This is driving me nuts. Sorry for the rant. Any pointers would be really appreciated.

[HopeS]

It is not clear if you are filing taxes for 2022 and your question relates to the 2022 tax year. You will need to prepare this Form and send it to the withholding agent which in your case is Fidelity since without this Form completed they will withhold taxes. Fidelity should be able to assist you with completing the Form.

If you are filing 2022 taxes, then please post another question.

IRS Instruction

You must give Form W-8BEN to the withholding agent or payer if you are a nonresident alien who is the beneficial owner of an amount subject to withholding, or if you are an account holder of an FFI documenting yourself as a nonresident alien. If you are the single owner of a disregarded entity, you are considered the beneficial owner of income received by the disregarded entity. Submit Form W-8BEN when requested by the withholding agent, payer, or FFI whether or not you are claiming a reduced rate of, or exemption from, withholding.

Do not use Form W-8BEN if you are described below.

• You are a foreign entity documenting your foreign status, documenting your Chapter 4 status, or claiming treaty benefits. Instead, use Form W-8BEN-E.
• You are a U.S. citizen (even if you reside outside the United States) or another U.S. person (including a resident alien individual). Instead, use Form W-9 to document your status as a U.S. person.
• You are acting as a foreign intermediary (that is, acting not for your own account, but for the account of others as an agent, nominee, or custodian). Instead, provide Form W-8IMY.
• You are a nonresident alien individual who claims exemption from withholding compensation for independent or dependent personal services performed in the United States. Instead, provide Form 8233 or Form W-4.

IRS W-8BEN

@tbudd 

[tbudd]

Thanks for the reply!

As indicated in my original post, I'm referring to transactions that happened in March 2023, and therefore they would be relevant to my taxes for 2023 (which I'd be filing in 2024).

I'm pretty aware of the requirement to fill the W-8BEN form, but as you can see in my last post on this thread, I'm trying to figure out the correct treaty details to be provided in line 10 of the same.

[DaveF1006]

To clarify, what type of visa do you possess and when did you enter the US? Do you plan on residing in the US for the entire 2023 tax year?

@tbudd 

[tbudd]

Sorry for leaving out some of the details on my residency.

Basically, I moved back to India from the US in April 2021, and have been living here ever since.

So, I was a non-resident to US (for tax purposes) for the entire year in 2022, and hopefully would remain so for 2023 as well.

[DaveF1006]

Yes, you will be considered a US non-resident in this case scenario and you and your capital gains income would be excluded under IRC section 7701(b)(3). Instead of a treaty detail, you would report the exclusion in this manner in 2024.

1. Open your return in TurboTax 
2. Click on Wages & Income 
3. Scroll down to All Income 
4. Scroll down to Less Common Income 
5. Scroll down to Miscellaneous Income, 1099-A, 1099-C 
6. Click start 
7. Scroll down to Other reportable income 
8. Enter description and amount. Assuming the capital gains is reported elsewhere, this will be reported as Excluded income under IRC section 7701(b)(3) and then represent the amount of the excluded income as a negative number.  -XXX.XX.
9. this will now appear in line 10 of Schedule 1 as an negative amount. 

@tbudd 

[tbudd]

Thanks for all the details!

But I believe I'd have to file 1040NR for 2023 next year, so TT won't be of any use there.

[tbudd]

Update : Fidelity has been pretty supportive on this. I finally got this resolved by uploading a "Reasonable Explanation Checklist" to declare my residency status. Hopefully the withheld amount would be released soon.

[tbudd]

Final update : Withheld amount got released on validation of residency certification.

Issue resolved.😀