Foreign Acount Tax Compliance Act (FATCA)
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) represents the United States efforts to combat tax evasion and abuse by US persons holding investments outside of the United States. The Act establishes a new set of tax information reporting and withholding procedures. While not expressly aimed at non-US persons, the regulations do impose withholding taxes on certain non-US entities that decline to disclose their US investors or account holders.
Under FATCA, US persons must report to the US tax authority, Internal Revenue Service (IRS), their assets held in offshore accounts. In addition, the regulations seek to require non-US financial institutions to report to the US tax authority certain information about financial accounts of US or US-owned investors and account holders.
How does this impact US Brokers, including Interactive Brokers?
As a broker based in the United States, Interactive Brokers is required to report information and make payment of withholding taxes to the IRS, for all of our customers. FATCA simply creates additional practices and withholdings to the current requirements for all US brokers.
Interactive Brokers will comply with the new rules. This may require additional disclosures by investors during the account application process, as well as expanded tax reporting. For all US institutions, FATCA becomes effective January 1, 2013. Any FATCA tax withholding requirements begin on January 1, 2014.
Additional aspects of the regulations will be phased-in over the next few years, including an expansion of US brokers reporting on US source income to non-US accounts through Form 1042-S.
What action is required for US persons?
No additional action is required for US persons holding Interactive Brokers accounts. US persons, who include US citizens, Green Card holders and other legal residents, need only to complete Form W-9 during the account application process to certify their tax status.
Does FATCA affect non-US accounts?
Yes. FATCA requires foreign financial institutions (FFIs) to furnish certain data directly to the IRS about any of their US taxpayer accounts or foreign entity accounts in which US taxpayers hold a certain level of ownership. FFI compliance with the new regulations becomes effective July 1, 2013 with the submission of electronic FFI applications to the IRS. The application forms are scheduled to be available through the IRS in January 2013.
All non-US persons and entities applying for and maintaining Interactive Broker accounts will continue to be required to fully disclose and indentify the identity of their account's beneficial owner(s). Through the IRS Form W-8, our account holders certify the beneficial owner's country of tax residence. If you fail to provide a Form W-8, or do not resubmit a new W-8 when prompted upon the three-year expiration, additional withholding will apply.
Some entities not ordinarily considered to be financial institutions may be categorized under FATCA as an FFI. Therefore, it is important to review the details outlined by the IRS.
Is there a summary of FFI requirements?
While the regulations and compliance are far more complex than a brief FAQ can describe, the following offers a short summary of actions required by those defined foreign financial institutions.
- Identify US taxpayers. If US taxpayers refuse to waive your non-US country's privacy or secrecy rules, then the US taxpayer account must be closed.
- Report to the IRS on the related US taxpayer activity within defined financial accounts.
- Withhold 30% US tax on US source income against any US taxpayer or foreign entity failing to disclose information or comply with the FATCA regulations.
Additional Information & Resources
The IRS remains the most comprehensive and up-to-date resource about FATCA compliance, implementation, and document filing. The IRS continues to issue news releases and forms. Please feel free to visit the IRS FATCA Website for details.
IRS Circular 230 Notice: These statements are provided for information purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal, state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor.
Tax Reporting: About Forms 1099
Forms 1099 are a series of U.S. tax information returns which report income earned as interest, dividends, proceeds from securities and commodities sale transactions, and other reportable payments posted to your account during a calendar year. These reports, which are supplied to the IRS, provide information, which should be used in preparing your tax return. For example, dividends and interest, are reported on IRS Form 1040, "U.S. Individual Income Tax Return", Schedule B. Sales transactions are to be reported on IRS Form 1040, "U.S. Individual Income Tax Return", Schedule D.
Information on reporting gains and losses, including determining the cost basis, can be obtained by reading IRS Publications 544, "Sales and Other Dispositions of Assets", and 551, "Basis of Assets." We recommend you consult your tax professional with specific questions.
All of the IRS forms and publications referenced above are available online at www.IRS.gov/formspubs
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax: UK Persons and Entities: W-8 Forms for Non-US Residents
You must complete a Form W-8 because the entity holding your client money is Interactive Brokers LLC, in the US.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax: Canadian Persons and Entities: Form T5008
Canadian Slip T5008, Statement of Securities Transactions, contains proceeds and cost information, but capital gains/losses are not reported.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax: Canadian Persons and Entities: Tax Form Availability
T5008 and T5 forms are available on February 28th.
The T3 forms are generally available on March 31st. Some T3s may be made available after this date if the information is received late. You should always try to match the available T3s with the distributions received as shown on your dividend report or account statements.
NR4s will be available March 31st.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax Reporting: Unrealized Capital Gains Distributions from Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs)
These gains are reported on Form 2439 in Box 1a. There may be tax paid on your behalf by the RIC or REIT; this tax is reported to you on Form 2439 in Box 2.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax Reporting: Understanding Qualified Dividends
Qualified Dividends are distributions which meet the criteria to be subject to a beneficial federal tax rate. In general, qualified dividends are distributions received from U.S. Domestic corporations or qualified foreign corporations where you have owned the investment for more than 61 days before or after the ex dividend date. IRS Publication 550 “Investment Income and Expenses” available free on line at www.IRS.gov and/or your tax professional can assist in determining if your dividends are eligible for the beneficial rate.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax Reporting: Understanding Ordinary Dividends
Dividends are paid by corporations, mutual funds, money market funds, and other entities such as REITs. Ordinary dividends include payments from foreign securities such as ADRs and foreign companies and net short-term gains from mutual funds. Dividends that have been reinvested are also included in this amount.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax Reporting: I already filed my taxes and have received a Corrected Form 1099. What do I do now?
You will have to file an amended tax return to report the information as reported on the corrected Form 1099. As the IRS verifies the information on your tax returns with the 1099s received from banks, brokers and other sources, you may receive a notice from the IRS indicating that your return was filed using incorrect information. Consult your tax or legal advisor for further information.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
