Thread: US Taxation of a foreign entity trading forex?

Hello. have an offshore company incorporated in Belize. No tax treaties with US. I've recently opened a trading account with a US-resident broker. I'll be trading primarily forex(spot and futures). I'm a resident/citizen of Bulgaria. My company will not have any permanent establishment(PE) in US, nor will it be a US resident for tax purposes. So, as I understand my company will be classified as a non-resident alien, whose income will no be effectively connected to any US-business. If I am correct, an account with a broker is not considered as a PE.

So, the first question is - how would IRS classify my profits? I've been told that when trading forex especially day-trading, IRS will consider my profits as ordinary income not cap. gains.

Second question, will I be liable to US taxation on either cap. gains or ordinary income, whichever the case may be? I've read in IRS Publication 519 my company would have to pay a 30% flat tax on all my profits(interest, dividends and income) without deduction, with exception of certain cap. gains. If my profits are classified as ordinary income, how will it influence the amount of tax paid or hopefully unpaid.

I know that my broker is obliged(according to IRS Publication 515) to apply withholding to my dividends and interest. I know that I have to submit Form W-8, to notify my broker that my company is a foreign entity. I know that my broker will not withhold any tax on my profits, but do I still need to report it for taxation to IRS? If so, what form wold I need to submit? 1040NR?

I would be grateful for any help.

Mike(fxmikefx@yahoo.com)

Hi Mike,

I reckon we already had some discussion with you on this subject, but I still find this question very interesting for non-resident traders.

We made a research on this subject and published an article on our website: Capital Gains Tax Exemption for Non-Resident Traders in the U.S..

Thank you very much for your question.

Best regards,
Offshore Advisor.
www.isla-offshore.com