Do you pay taxes on foreign stocks? Guide

Quick note

This article answers the frequent question "do you pay taxes on foreign stocks" for U.S. taxpayers and foreign investors. It explains how dividends, capital gains, withholding, the foreign tax credit (FTC), PFIC rules, and reporting obligations work. You’ll also find practical examples and a compliance checklist so you can take next steps and know when to seek professional help. The term "do you pay taxes on foreign stocks" appears throughout to help you quickly locate the core topic.

Overview of taxation on foreign investments

U.S. tax residents (U.S. citizens, green card holders, and those meeting the substantial presence test) are taxed on worldwide income. That means the question "do you pay taxes on foreign stocks" for U.S. persons typically has a clear answer: yes — foreign dividends, interest, and capital gains are taxable in the U.S., though foreign governments may also withhold tax at source.

Nonresident aliens (NRAs) are generally taxed in the U.S. only on U.S.-source income and income effectively connected with a U.S. trade or business. So, for NRAs the answer to "do you pay taxes on foreign stocks" will depend on whether the income is U.S.-source or connected to U.S. activities.

Foreign withholding reduces the cash you receive and can often be claimed as relief on your U.S. return using the foreign tax credit or, in limited cases, as an itemized deduction.

Key definitions

• Foreign stock / foreign fund: a security issued by a company incorporated or organized outside the U.S., or a mutual fund/ETF registered outside the U.S. Funds domiciled abroad are often treated differently for U.S. tax purposes.
• U.S. person: U.S. citizens, U.S. residents (green card holders), and those who meet the substantial presence test. U.S. persons are taxed on their worldwide income.
• Nonresident alien (NRA): an individual who is not a U.S. citizen and does not meet residency tests; NRAs are taxed mainly on U.S.-source income.
• Foreign Tax Credit (FTC): a U.S. tax mechanism (Form 1116) to avoid double taxation when foreign taxes were paid on foreign-source income.
• Withholding tax: tax withheld at source by a foreign country from dividends, interest, or other payments to nonresidents.
• PFIC (Passive Foreign Investment Company): many non-U.S. mutual funds and foreign pooled vehicles qualify as PFICs for U.S. shareholders and face punitive U.S. tax/timing rules.
• Taxable vs. tax-advantaged accounts: IRAs, 401(k)s, and Roth accounts are U.S. tax-advantaged; foreign taxes paid on investments inside such accounts generally don’t generate a U.S. foreign tax credit.

Taxable events and how foreign stocks are taxed

Dividends

• For U.S. persons: dividends from foreign corporations are generally taxable as ordinary income or qualified dividends (if the dividend meets the U.S. qualified dividend rules and the foreign corporation is eligible). Your broker will typically report dividend income on Form 1099-DIV (Box 1a for total ordinary dividends; Box 1b for qualified dividends where applicable).
• Foreign withholding: many countries withhold tax at source on dividends to nonresident shareholders (common rates range from 0% to 30% depending on the country and tax treaty). Withholding reduces the cash you receive but does not eliminate U.S. tax liability.
• Reporting: you must report the gross dividend (before foreign withholding) on your U.S. return; foreign tax withheld is reported and may be claimed as an FTC.

Capital gains

• For U.S. persons: capital gains on the sale of foreign stocks are taxed by the U.S. just like gains on domestic stocks — short-term gains taxed at ordinary rates, long-term gains at preferential rates if held over one year.
• For NRAs: capital gains from selling stocks of non-U.S. companies are generally not taxed by the U.S. unless the gain is effectively connected with a U.S. trade or business or involves U.S.-situs real property. Gains on U.S. securities sold by NRAs may also be exempt unless connected or subject to FIRPTA rules (real property).

Interest and other income

• Interest from foreign sources is generally taxable to U.S. persons. Certain portfolio interest exemptions can apply in limited cases.
• Other income (royalties, dividends-in-kind, compensation) will be assessed per general sourcing rules.

Withholding at source

• Foreign withholding tax is common on dividends and can also apply to interest, depending on the payer’s country law.
• Withholding reduces cash flow and can create U.S. FTCs that require Form 1116 to claim.

Foreign Tax Credit (FTC) and deduction

Purpose and choice

• The FTC exists to prevent double taxation — when you pay foreign tax on foreign-source income and then owe U.S. tax on the same income.
• On Form 1040 you can choose between claiming a foreign tax credit (Form 1116) or taking the foreign taxes as an itemized deduction on Schedule A. The credit is usually preferable because it offsets U.S. tax dollar-for-dollar.

Form 1116 and limits

• Form 1116 is used to calculate allowable foreign tax credits. You usually need Form 1116 if you paid foreign tax and want to claim it as a credit, except in limited situations where you can claim up to $300 ($600 married filing jointly) of foreign taxes without a Form 1116 if the foreign taxes were on dividends, interest, or royalties and meet certain conditions.
• The FTC is limited: you cannot claim more foreign tax credit than the portion of your U.S. tax attributable to your foreign-source taxable income. Mathematically: FTC limit = (Taxable foreign-source income / Worldwide taxable income) × U.S. tax liability.

Carryback and carryforward

• Disallowed foreign taxes can often be carried back 1 year and forward up to 10 years.

Practical points

• Keep accurate records of foreign taxes paid; brokers often report foreign taxes in Box 6 of Form 1099-DIV or on supplemental statements.
• The FTC can be claimed for corporate-level taxes on foreign mutual fund dividends when passed through to shareholders.

Reporting and documentation

Key forms and documents

• Form 1099-DIV: reports dividends and foreign tax paid (brokerages commonly include foreign tax withheld in a box or supplemental statement).
• Form 1099-INT: reports interest income.
• Form 1042-S: used to report payments to foreign persons and withholding on U.S.-source income.
• Form 1116: foreign tax credit computation for individuals.
• Form 8621: PFIC reporting for U.S. owners of PFICs (critical for foreign mutual funds / pooled investments).
• Form 8938 (FATCA): reporting specified foreign financial assets if thresholds are met.
• FBAR (FinCEN Form 114): reports foreign bank and financial accounts if aggregate balances exceed $10,000 at any time during the year.
• Forms 5471, 8865, 8858: informational returns for U.S. persons with interests in certain foreign corporations, partnerships, and disregarded entities.

Broker statements and reporting from funds

• Many funds report foreign taxes paid on behalf of shareholders. For example, U.S.-domiciled funds will often provide the portion of distributions that represents foreign taxes paid and whether those taxes are eligible for FTC treatment.
• If you hold foreign funds directly, expect PFIC issues and Form 8621 reporting requirements.

Special rules for foreign mutual funds and PFICs

PFIC basics

• A Passive Foreign Investment Company (PFIC) is typically a non-U.S. corporation where 75% or more of its gross income is passive or at least 50% of its assets produce passive income. Many foreign mutual funds and pooled investment vehicles meet these tests.

Why PFIC rules matter

• PFIC rules impose punitive tax treatment and interest charges on excess distributions and gains unless a U.S. shareholder makes a timely election (QEF or mark-to-market in certain cases).
• Failure to file Form 8621 for PFIC interests can lead to severe reporting penalties and onerous tax outcomes.

Common structures and differences

• Foreign-domiciled ETFs that trade in the U.S. or hold securities in-kind may be more tax efficient than foreign mutual funds that distribute taxable income to shareholders and trigger PFIC treatment.
• Many foreign mutual funds that are not structured to meet U.S. rules will be PFICs for U.S. investors.

Practical guidance

• Before buying a foreign fund, ask whether the fund will be treated as a PFIC and whether the fund provides information (e.g., QEF statements) that helps with U.S. reporting.
• PFIC rules are complex; for significant holdings, consult a tax advisor.

Asset location and retirement accounts

• Holding foreign stocks in taxable accounts: U.S. persons can claim FTCs for foreign taxes paid on holdings in taxable accounts.
• Holding foreign stocks in tax-advantaged accounts (IRAs, 401(k)s): foreign taxes paid on investments inside IRAs generally do not produce a U.S. FTC. That means the foreign withholding inside IRAs is effectively a permanent tax cost with no U.S. offset.
• Tradeoff: placing tax-efficient or PFIC-prone foreign holdings in taxable accounts may let you claim the FTC, while retirement accounts may be preferable for U.S. equities or tax-deferred strategies.
• For investors using Bitget Wallet or Bitget services, consider asset location and tax implications before funding tax-advantaged accounts with certain foreign investments.

Tax treatment by investor type and residence

U.S. citizens and residents

• Taxed on worldwide income. If you ask "do you pay taxes on foreign stocks" as a U.S. person, the general answer is yes: you typically must report foreign dividends, interest, and gains and may need to file Form 1116, FBAR, or other forms.
• You can generally claim a foreign tax credit for foreign taxes paid, subject to limits.

Nonresident aliens (NRAs)

• NRAs are taxed mainly on U.S.-source income. If an NRA asks "do you pay taxes on foreign stocks" from the U.S. perspective, the key is sourcing. Foreign-source dividends and gains usually aren’t taxed by the U.S. for NRAs.
• NRAs who receive U.S.-source dividends may face U.S. withholding (often 30% unless reduced by a tax treaty). NRAs use Form W-8BEN (or W-8BEN-E for entities) to claim treaty benefits and reduce withholding.

Foreign investors in U.S. stocks

• Foreign investors holding U.S. stocks can face U.S. withholding on U.S.-source dividends. Capital gains on U.S. equities are generally not taxed in the U.S. for NRAs unless connected to a U.S. trade or business.
• Foreign investors must generally furnish W-8 forms to brokers to avoid backup withholding and claim treaty rates.

Tax treaties and withholding reductions

• Tax treaties between the U.S. and foreign countries commonly reduce withholding rates on dividends and other passive income. Treaty rates often drop withholding from 30% to 15%, 5%, or even 0% depending on the treaty and ownership percentage.
• To claim treaty benefits, non-U.S. persons typically submit Form W-8BEN or W-8BEN-E to their broker or withholding agent.
• Many U.S. persons don’t need treaties when they’re claiming FTCs, but treaty rules can still change the foreign withholding that creates the FTC.

U.S. estate and gift tax considerations

• U.S. estate tax applies differently to nonresident noncitizens. As of the time of writing, U.S. situs assets (including U.S. stocks) are subject to U.S. estate tax for nonresident noncitizens, while foreign stocks generally are not.
• If you are asking "do you pay taxes on foreign stocks" with estate planning in mind: foreign stocks owned by nonresident noncitizens are usually outside the U.S. estate tax base, but U.S. situs assets (including many U.S.-domiciled securities) may be taxable.
• When planning cross-border holdings, consult an estate tax professional.

Practical examples and calculations

Example 1 — U.S. taxpayer receives foreign dividends with 15% withholding

• Gross dividend from foreign company: $1,000.
• Foreign withholding at source (15%): $150 withheld; cash received = $850.
• U.S. taxable income reported: $1,000 dividend (report gross amount).
• U.S. tax calculation: assume marginal U.S. tax and qualified dividend treatment leads to U.S. tax of $150 on that dividend (for illustration — actual tax depends on filing status and rates).
• FTC: You can claim the $150 foreign tax as a credit against U.S. tax on the same income. If U.S. tax attributable to the foreign income is $150, the FTC offsets U.S. tax entirely, leaving $0 additional tax owed on the dividend. If U.S. tax were $200, your FTC would be limited to $150, and you would owe the $50 difference.

Key step-by-step when you get a 1099-DIV showing foreign taxes:

1. Report the gross dividend ($1,000) on Form 1040.
2. Report foreign tax paid ($150) on Form 1116, unless eligible for the small-amount exception.
3. Compute FTC limit: (Foreign-source taxable income / Worldwide taxable income) × U.S. tax on worldwide income.
4. Claim allowable FTC or deduct as an itemized deduction if preferable.

Example 2 — Nonresident investor selling U.S. stock

• NRA sells U.S. stock that is not connected to a U.S. trade or business. Generally, the gain is not subject to U.S. tax. However, if the NRA receives U.S.-source dividend income, that dividend may be subject to U.S. withholding.

Example 3 — PFIC impact (simplified)

• U.S. investor holds shares in a foreign mutual fund that is a PFIC. The investor sells the shares for a gain or receives an excess distribution.
• Without a QEF or mark-to-market election, the investor may face an allocation of the gain over the holding period, taxed at ordinary rates, plus an interest charge on deferred tax — often a much worse outcome than regular capital gains tax.
• Form 8621 must be filed for PFIC holdings; missing the filing can produce penalties and a legacy of complicated returns.

Compliance checklist and steps for investors

1. Determine your tax residency status (U.S. person vs. nonresident). This answers the primary part of "do you pay taxes on foreign stocks."
2. Collect broker statements and Forms (1099-DIV, 1099-INT, supplemental statements showing foreign taxes).
3. Identify whether foreign funds you hold are PFICs. Request PFIC information from the fund or adviser.
4. Decide on FTC vs. deduction. If claiming an FTC, prepare Form 1116 and calculate limits.
5. Check for FATCA/FBAR filing thresholds to determine if Form 8938 or FBAR is required.
6. File Form 8621 for PFIC holdings every year you own the investment.
7. If you are a nonresident, ensure you’ve provided W-8BEN/W-8BEN-E to your broker to claim treaty benefits.
8. Review asset location: consider whether foreign investments should be in taxable accounts (to capture FTC) or retirement accounts (for deferral).
9. Keep country-by-country records of foreign taxes paid for the FTC and Form 1116.
10. When in doubt, consult a CPA or cross-border tax specialist for complex situations.

Common pitfalls and frequently asked questions

• Q: If I hold foreign stocks inside an IRA, can I claim the foreign tax credit?

  • A: Generally no. Foreign taxes paid within an IRA or other tax-advantaged account do not generate a U.S. foreign tax credit for the IRA owner. This is a common trap: foreign withholding inside tax-deferred accounts can be a permanent drag on returns.

• Q: Are foreign mutual funds always bad for U.S. investors because of PFIC rules?

  • A: Not always, but many foreign mutual funds are PFICs and bring complex reporting and potentially punitive tax treatment. Always check PFIC status and available elections. Some foreign ETFs with in-kind structures are more tax-efficient.

• Q: Can foreign withholding fully eliminate my U.S. tax on foreign dividends?

  • A: Yes, if the foreign withholding equals or exceeds the U.S. tax attributable to the foreign income and you can claim the full FTC. But you must compute the FTC limit carefully; you cannot claim more credit than the U.S. tax attributable to that foreign-source income.

• Q: How often do I need to file Form 8621 for PFICs?

  • A: Generally every year you own a PFIC, even if you have no distributions or sales that year.

• Q: Do I pay U.S. tax on capital gains from foreign stocks?

  • A: If you are a U.S. person, yes — capital gains on foreign stocks are taxable in the U.S. If you are a nonresident alien and the gains are foreign-source (not U.S.-situs), the U.S. typically does not tax those gains.

Common mistakes to avoid

• Failing to report gross foreign dividends (report the gross amount, not the net after withholding).
• Ignoring PFIC reporting obligations and elections.
• Placing heavily foreign-taxed holdings in IRAs where FTC benefits are lost.
• Failing to submit W-8 forms for non-U.S. investors to claim treaty benefits and avoid excessive withholding.

Further reading and authoritative resources

For authoritative guidance, refer to IRS publications and the instructions for the forms noted above (e.g., IRS Publication 514 on foreign tax credit, Form 1116 instructions, Form 8621 instructions, Publication 515 on withholding of tax on nonresident aliens). Financial institutions and tax preparers (including broker statements) typically provide fund-specific reporting and PFIC notices.

Source acknowledgement: this guide integrates principles widely discussed by tax guidance providers and industry references (e.g., Investopedia, TurboTax, Charles Schwab, Vanguard, and PFIC-specific advisors). Use them for deeper dives and keep current with IRS guidance.

When to get professional help

Seek a CPA, enrolled agent, or tax attorney if you:

• Own or control foreign corporations, partnerships, or trusts.
• Have significant PFIC exposure or need QEF elections.
• Have large foreign tax credits that require careful allocation across jurisdictions.
• Face multi-jurisdictional reporting obligations (FBAR, FATCA, Forms 5471/8865).
• Need cross-border estate planning or own U.S. situs assets as a nonresident.

Professional help can reduce audit risk and ensure you take available credits and elections without missing complex filing deadlines.

Frequently used forms summary

• Form 1099-DIV: dividend reporting (watch for foreign tax information).
• Form 1116: claim foreign tax credits (FTC).
• Form 8621: PFIC reporting and elections.
• Form 8938: FATCA asset reporting.
• FBAR (FinCEN 114): reporting foreign financial accounts over $10,000 aggregate.
• W-8BEN / W-8BEN-E: nonresident forms to claim treaty rates and avoid backup withholding.

Practical investor tips and product note

• Keep detailed records of gross dividend amounts and foreign taxes withheld — brokers often provide this data but back up with statements.
• If you frequently invest in foreign securities, consider account structure and whether to hold certain assets in taxable accounts to preserve FTC benefits.
• When using trading platforms or wallets, prefer services that provide clear tax reporting and statements. For crypto and Web3 interactions, Bitget Wallet offers integrated tools; for trading or custody, Bitget’s platform provides tax-report-friendly statements and consolidated records.
• Avoid assuming foreign withholding automatically resolves your U.S. tax obligations — compute the FTC limit and file Form 1116 where needed.

Short policy-relevant note (news context)

As of 22 January 2026, media coverage noted rising household financial stress and increased credit defaults in some regions, which can change investors’ risk tolerance and tax planning choices. According to reporting on 22 January 2026 (source: PA Wire summary), credit card defaults rose sharply at year-end and mortgage demand softened — factors that may affect investor liquidity and decisions about accessing or selling foreign holdings to meet cash needs. This is background information and not tax advice; check current economic indicators when deciding whether to realize gains or restructure portfolios.

Final checklist and next steps

• Answer the core question: "do you pay taxes on foreign stocks?"
  • If you are a U.S. person: Yes, generally taxed on dividends, interest, and capital gains; you may claim the FTC for foreign taxes paid.
  • If you are a nonresident alien: U.S. tax depends on whether income is U.S.-source or effectively connected; foreign-source gains are generally not taxed by the U.S.
• Gather paperwork (1099s, broker statements, fund notices) and compute gross income and foreign taxes paid.
• File Form 1116 to claim FTC when appropriate; file Form 8621 for PFIC interests; ensure FBAR/FATCA thresholds are reviewed.
• Consider asset location and whether foreign holdings should remain in taxable vs. tax-advantaged accounts.
• If you use digital wallets or exchanges, prefer platforms with robust tax reporting features. Bitget and Bitget Wallet provide services and record-keeping that can simplify tax reporting for eligible users.
• Consult a qualified tax professional for complex PFICs, cross-border structures, or large foreign tax-credit claims.

More practical resources and alerts are available inside your brokerage and wallet statements — check them early, and keep annual records organized to simplify Form 1116 and any PFIC filings.

FAQ (quick answers)

• Q: Do you pay taxes on foreign stocks if you live in the U.S.?

  • A: Yes — U.S. residents are taxed on worldwide income including dividends and gains from foreign stocks.

• Q: Can foreign taxes paid be credited on my U.S. return?

  • A: Often yes; use Form 1116 to claim the foreign tax credit subject to limits.

• Q: Are foreign mutual funds treated differently?

  • A: Many are PFICs for U.S. investors; PFIC rules can be punitive and require Form 8621 reporting.

• Q: If a foreign country withheld tax on my dividend, do I still have to pay U.S. tax?

  • A: You report the gross dividend in the U.S.; the foreign withholding may offset U.S. tax through the FTC but check the FTC limit.

• Q: Should I put foreign stocks in my IRA?

  • A: Be careful — foreign withholding inside an IRA doesn’t typically give you a U.S. FTC, so the foreign tax may be a permanent cost inside retirement accounts.

More practical help

If you want a tax-reporting checklist or a simple worksheet to compute the FTC limit for a sample foreign dividend year, I can provide one in spreadsheet-ready format. For trading and custody that simplify record-keeping, consider Bitget’s platform and Bitget Wallet for clear statements and exportable tax data.

Further exploration: ask for the sample Form 1116 walk-through, a PFIC decision tree, or an asset-location planner tailored to U.S. vs. nonresident investors.