How Non-U.S. Citizens Can Trade The U.S. Option Markets

Article Summary


Many Brokers, such as TD Ameritrade allow international trading on the U.S. Based Options Markets.  The U.S. Options Markets are the largest and most liquid in the world.  This article will explain how to gain access:

  • Who the U.S. considers resident aliens, and nonresident aliens.
  • The requirements for nonresident aliens to trade in the U.S Options Market.
  • Safety and security concerns.
  • General broker's requirements for opening a brokerage account of a non-resident alien.

We consider the Unites States a land of opportunities. Few countries in the world can boast of an ecosystem which allows entrepreneurs and businesses to flourish the way U.S. does. And wherever there is business, there will always be finance. Whether it is technology, media, construction or oil and gas.

Most of the biggest companies in the world are domiciled in the U.S. To put things into perspective, the market cap of Apple is over $900 billion. It is greater than the value of all the stocks listed in the Mexican stock market combined and nearly half of the French stock market.

For an options trader, the most important factors to consider before venturing into a new market are breadth, liquidity and volatility of the given market. Needless to say, due to its sheer size, the U.S. financial markets fulfill all the above criteria like no other country’s financial markets.

For a U.S.-based trader, the requirements for trading in U.S. option market are as simple as filling few forms on the web. However, the requirements are much more stringent for someone who is not a U.S. citizen.

However, before we proceed to the requirements, one needs to first identify whether he or she is a ‘resident alien’ or a ‘nonresident alien’.

Resident Alien vs. Nonresident Alien

The Internal Revenue Services defines an ‘alien’ as someone who is not a U.S. citizen. They are broadly classified into two categories - resident alien and nonresident alien. An individual who doesn’t have a green card (is not an immigrant), hasn’t stayed in the U.S. for more than 183 days in the past 3 years or more than 31 days in the current year (substantial presence test) and who doesn’t have any other business or trade interest in the U.S. (other than trading in U.S. securities like options) is considered a non-resident alien.

Conversely, someone who holds a green card, fails the criteria of the substantial presence test or has business or trade interest in the U.S. other than trading U.S. securities is regarded as a resident alien.

Note on Tax Implications:


The requirements for trading U.S. options and the tax implications vary according to whether a person is a resident or non-resident alien.

For a resident alien the requirements for trading U.S. options are very similar to that of a U.S. citizen. One needs to select a broker of one’s choice and provide the details the broker requires. This generally includes the Social Security Number or a Taxpayer Identification Number (issued by IRS) , driver license number, statement information of assets or cash one wants to transfer to the brokerage account and employer’s name and address (applicable only in certain cases). The tax implication for money that a resident alien earns through trading in U.S. securities is exactly the same as it is for a U.S. citizen.

A non-resident alien doesn’t need to pay any capital gain tax for income that he/she earns through trading U.S. securities. However, a non-resident alien does have to pay a 30% tax on income through dividends of U.S. companies if the investment is long-term.

Since an option trader isn’t ‘investing for long-term’, a nonresident alien option trader doesn’t need to pay any tax in the U.S. for income that is earned through trading options.

Requirements For A Nonresident Alien To Trade In U.S. Option Market

Of course, a nonresident alien can trade U.S. options by opening an account with a U.S.-based online broker. However, the requirements for opening an account vary from broker to broker. Some brokers don’t allow nonresident aliens to open an account at all, while some allow citizens of only a few countries that they prefer to open an account.

The most crucial factor for a broker to open an account for a nonresident alien is his or her nationality. One will need to check with broking firms to ensure if they allow the citizens of their country to open an account. Another important point to note is that even if a broker allows one to open an account, most brokers require the application and necessary documents to be submitted through mail (or fax), in physical form, rather than electronic submission.

Moreover, there can be other compliances and regulations to be followed that may differ from broker to broker. For example, all the transactions could only be done through wire transfers or all the important notifications related to the account will only be sent electronically.

Once one has found a broker, the requirements for opening an account may again vary from broker to broker. However, some of the general requirements include;

  1. Application form – Details such as name of the applicant, date of birth, nationality, address, profession etc. needs to be filled.
  2. Copy of applicant’s passport for identification purposes.
  3. Copy or original of most recent financial/bank statement (Generally not more than 6 months old)
  4. Copy or original of a utility bill (Electricity, Gas, Water etc.)
  5. Minimum deposit to open the account (can vary from $2,000 to $10,000)
  6. W-8BEN Form
  7. Traders who wish to trade in options might also need to fill a separate form stating the same.


Note on Broking Firms:


Though there are various broking firms in the U.S. that entertain international clients, some of the best brokers for a non-U.S. retail option trader includes the following: (Please check with the broker if they allow accounts from your country)

w-8ben


Form W-8BEN

All nonresident aliens are subject to 30% flat tax (or lower if their country has a treaty with the U.S.) for certain income (including trading income). It is mandatory for the payor to withhold this 30% tax and pay it over to the IRS or else the payor will be held liable for it. Form W-8BEN, also known as ‘certificate of foreign status of beneficial owner for United States Tax withholding and reporting’, allows non-resident aliens to certify their non-U.S. citizen status and avoid the 30% tax withholding.

The W-8BEN is a simple one page form that one can fill without any guidance and its only purpose is to identify the applicant as a non-U.S. citizen. One can take a look and also download the form directly from the IRS website.

Safety & Security - The Primary Concerns

Although there are other unconventional methods through which traders can get exposed to U.S. option markets like CFDs and unregulated binary option brokers, none of them are as safe and secure as having a U.S. brokerage account.

Even when it comes to costs, the minimum account opening requirement may work as barrier. However, the commissions charged by registered U.S. brokers, especially online discount brokers is much lower than those charged by CFD firms and binary brokers directly and indirectly (through large spreads etc.).

Moreover, U.S.-based broking firms are regulated by the U.S. Securities and Exchange Commission (SEC), so the risk of them going bankrupt or running away with a clients’ money is nearly non-existent when compared to other unregulated players.

Key Takeaways

  • The U.S. financial markets provide better breadth, liquidity and volatility, crucial factors for option traders to trade in a market, than any other financial markets in the world.
  • Before a foreign citizen considers trading in the U.S. option markets, one needs to check their resident status i.e. whether one is a ‘resident alien’ or a ‘nonresident alien.’
  • Procedures and requirements for a resident alien to trade in U.S. option market are similar to that of a U.S. citizen.
  • A nonresident alien needs to find a U.S.-based broker that allows individuals of his/her nationality to open an account.
  • The procedure and requirements for opening a non-resident alien brokerage account may vary from broker to broker.
  • General requirements by brokers for opening brokerage account of a non-resident alien include – application form, copy of passport, copy or original of bank/financial statement, copy or original of a utility bill, Form W-8BEN, minimum deposit and a separate form if the applicants wants to trade in options and/or on margin.
  • Form W-8BEN certifies the nonresident status of an applicant and frees the broker from withholding 30% of the income (trading profits).
  • Opening an account with a U.S-based broker is the safest and most secure method to trade U.S. option market as they are regulated by the SEC unlike unconventional and unregulated mechanisms like CFDs and binary options.

Disclaimer:

All the suggestions, opinions and contents mentioned in this blog are merely for educational purposes and are not recommendations offered to anyone regarding transacting in securities. Neither the author nor optionautomator.com accepts any liability accruing from the use of any of the content from this blog. Readers must rely on their own discretion.

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