FinTech companies focused on facilitating the acquisition of stocks on the New York Stock Exchange and NASDAQ are fast becoming mainstream investment outlets for young Nigerians seeking alternative sources of revenues. The increasing adoption has also triggered a wave of fundraising for the likes of Chaka, the pioneer in this nascent industry.
These apps ensure Nigerians can now trade (buy and sell) foreign stock market investments from Nigeria. The platform also provides Nigerians with an avenue to diversify their investments across financial assets and across geography, especially the United States of America.
While investments in foreign markets will broaden the playing field for Nigerians and grant them the opportunity to profit from such foreign markets, most Nigerians lack knowledge about the tax implication of investing in markets like that of the US. In the US, tax is a big thing and it is difficult and illegal to evade taxes, although it is possible to avoid them with good tax planning strategies.
For those contemplating using the Chaka, Bamboo or Trove platform to trade in US securities, the question that should be paramount in their minds should be, “How will the income or gain from my investment in US stocks be taxed in the US?”
Why worry about taxes on your investments?
Investors should be concerned about taxes on their investments because such taxes, especially in the US and the Western World can be huge or substantial. Any strategy that helps reduce the impact of such taxes will go a long way in improving the after-tax yield or return on investments. The good news is that certain types of financial instruments held by foreign investors receive preferred tax treatment under US Tax laws, so knowing what those instruments are could help in minimizing the impact of taxes on your investment.
The US has tax treaties with many countries and such treaties reduce or eliminate US taxes on investment incomes and gains. Therefore, knowing if and what tax treaty the US has with Nigeria will go a long way in planning your investments.
The taxability of investment income or gain in the US depends on the type of income or gain and the residential status of who earns the income. Although users of the Chaka platform may include Nigerians who are residents in the US, this piece is tailored mostly to Chaka platform users that are resident in Nigeria or other African countries. Those will be referred to, and rightly so, as nonresidents.
Nonresidents are taxed on their investment income from US sources and on certain other incomes treated as effectively connected with trades or businesses conducted in the US.
Portfolio investments are not treated as effectively connected since they are not trade or business-related.
Taxation of dividend income
Gross Investment income is taxed at 30% in the US. The only exception to that is if there is a tax treaty in effect or if the type of investment from which the income is sourced is given preferred tax advantage or treatment. It is important to note that the US tax law requires that the 30% tax be withheld at source. What this means is that you will receive net income. It is therefore the obligation of the payer of the income to remit the tax to the US taxing authority.
For example, if an investor living in Nigeria buys 100 shares of Apple through Chaka trading platform using Morgan Stanley as the broker, if Apple pays $1 per share dividend, Morgan Stanley will receive $100 dividend on behalf of the Nigerian investor, but will only credit $70 to the investor’s account because it will withhold, $30, representing 30%, for remittance to the US Internal Revenue Services.
For income to be taxed as dividend, the distribution must have come from earnings and profits. If the distribution or payment is from partial or complete liquidation of a corporation, such payment is not subject to US taxation as it is considered return of capital.
Taxation of gains from the sale of stocks
Unlike US residents, nonresident investors are not subject to taxation on the capital gains tax. Capital gain arises when an investor sells his or her shares in a corporation at a profit, so when you sell your investment in Apple at a profit, you will not be required to pay any capital gains tax in the US, either long- or short-term capital gains tax.
Now that you know what you are up against in relation to the taxation of your stock market investments in the US, the ball is in your court, good luck.