How the US Actually Taxes a Nonresident Alien
The IRS splits a nonresident alien's US income into two buckets and taxes them on completely different principles.
Almost every confusion about this subject comes from reading about one bucket and assuming it describes both.
Income effectively connected with a US trade or business is taxed at graduated rates, on the net, with deductions allowed. Everything else that is US-source and passive is taxed at a flat 30 percent, or a lower treaty rate, on the gross, with no deductions at all.
Then there are the exemptions, and this is where the IRS's own publishing works against a reader. Interest on a US bank deposit is excluded from income where it is not connected with a US trade or business and comes from the deposit types the IRS lists. Portfolio interest that qualifies is not subject to chapter 3 withholding, though chapter 4 can still reach it.
And capital gains can be fully tax exempt on a day count that has nothing to do with the day count deciding your status.
Publication 519 carries the split, the rate and both exclusions, which is exactly why they get missed. It runs to nearly 98,000 words, and the exclusions are printed some 7,000 words before the rate they qualify, so a reader who searches straight to the rate arrives after them. The one piece that is not in Publication 519 at all is the warning about the two day counts. For that the IRS uses a separate page, about FDAP income. This page carries all of it, and quotes every piece from the text it came from.
Two buckets, two completely different rules
Publication 519, the 2025 edition for use in preparing 2025 returns, sets out the split, and it is the frame for everything that follows.
A nonresident alien’s income that is subject to U.S. income tax must be divided into the following two categories. Income that is effectively connected with a trade or business in the United States. Income that is not effectively connected with a trade or business in the United States (discussed under The 30% Tax, later).
Publication 519 then draws the contrast between the two categories directly.
The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate.
The IRS's separate page on effectively connected income spells out what after allowable deductions means, and it is the half people miss.
ECI is taxed at graduated rates or lesser rates under a tax treaty on the net ECI. That is, deductions are allowed against gross ECI to arrive at taxable net ECI.
Net, and deductions allowed. Hold that sentence, because the other bucket is its exact opposite.
Two buckets, two rules, and the exemptions printed thousands of words before the rate. That is the whole subject.
Book Your Assessment CallThirty percent, on the gross, with nothing deducted
The second bucket is the one most non-residents actually meet, because it covers passive US-source income. Publication 519 states the rate and its condition together.
Tax at a 30% (or lower treaty) rate applies to certain items of income or gains from U.S. sources but only if the items are not effectively connected with your U.S. trade or business.
Then it states the base that rate applies to, and this is the line that surprises anyone used to being taxed on profit.
The 30% (or lower treaty) rate applies to the gross amount of U.S. source fixed, determinable, annual, or periodical (FDAP) gains, profits, or income.
Gross. The IRS states the consequence out loud on its own topic page rather than leaving it to be inferred.
FDAP income is taxed at a flat 30 percent (or lower treaty rate, if qualify) and no deductions are allowed against such income.
No deductions. Costs, fees and losses associated with that income do not reduce it, because the tax is not computed on a profit at all.
FDAP itself is defined by exclusion, and the carve-outs inside that definition are where the detail lives, including what is and is not inside the sale-of-property exception.
Fixed, determinable, annual, or periodical (FDAP) income is all income except: Gains derived from the sale of real or personal property (including market discount and option premiums but not including original issue discount). Items of income excluded from gross income, without regard to the United States (U.S.) or foreign status of the owner of the income, such as tax-exempt municipal bond interest and qualified scholarship income.
Two different 183-day tests, and the IRS says so
This is the most consequential distinction on the page, and the one almost never written correctly anywhere else.
One 183-day test decides whether you are a resident for tax purposes. A separate 183-day test decides how your capital gains are treated. They are not the same test, and the IRS states that plainly, on its FDAP page.
The183-day test mentioned above is not the same as the 183-day test used in the substantial presence test.
The missing space in that sentence is the IRS's own, reproduced rather than tidied.
The practical consequence is that a person can be a nonresident alien under one test while being over the line on the other, which is exactly the combination that produces an unexpected bill. The status tests are set out in full here.
Under 183 days, the IRS's own word is exempt
Here is the rule in Publication 519's wording, and the operative phrase is not a rate.
If you were in the United States for less than 183 days during the tax year, capital gains (other than gains listed earlier) are tax exempt unless they are effectively connected with a trade or business in the United States during your tax year.
Tax exempt. Not a reduced rate, and not a relief that has to be claimed. The other side of the same line reads:
If you were in the United States for 183 days or more during the tax year, your net gain from sales or exchanges of capital assets is taxed at a 30% (or lower treaty) rate. For purposes of the 30% (or lower treaty) rate, net gain is the excess of your capital gains from U.S. sources over your capital losses from U.S. sources. This rule applies even if any of the transactions occurred while you were not in the United States.
Note the word net there, and note that the same passage defines it: net gain is the excess of US-source capital gains over US-source capital losses.
The exemption is not unconditional, and the IRS lists what it does not reach.
The following gains are subject to the 30% (or lower treaty) rate without regard to the 183-day rule, discussed later. Gains on the disposal of timber, coal, or domestic iron ore with a retained economic interest. Gains on contingent payments received from the sale or exchange of patents, copyrights, and similar property after October 4, 1966. Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before October 5, 1966. Gains on the sale or exchange of OID obligations.
That list is quoted in full above rather than summarised, because the exemption is only as wide as the exceptions to it.
The rate is published. What lands in which bucket is the conversation.
Book Your Assessment CallTrading US stocks is not, by itself, a US trade or business
This answers a question people ask constantly and usually get answered wrongly, and the IRS is unusually direct about it.
If your only U.S. business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U.S. resident broker or other agent, you are not engaged in a trade or business in the United States.
Trading for your own account gets its own sentence, including the part about being physically present while doing it.
You are not engaged in a trade or business in the United States if trading for your own account in stocks, securities, or commodities is your only U.S. business activity. This applies even if the trading takes place while you are present in the United States or is done by your employee or your broker or other agent.
There is a published exception, and it is the one that changes the answer.
This discussion does not apply if you have a U.S. office or other fixed place of business at any time during the tax year through which, or by the direction of which, you carry out your transactions in stocks, securities, or commodities.
The two exclusions Publication 519 prints first
These make the flat 30 percent far less universal than it first reads, and Publication 519 prints them some 7,000 words ahead of the rate itself.
First, interest on a US bank deposit. Publication 519 does not reduce it, it excludes it.
Interest income that is not connected with a U.S. trade or business is excluded from income if it is from: Deposits (including certificates of deposit) with persons in the banking business; Deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law (if the interest paid or credited can be deducted by the association); and Amounts held by an insurance company under an agreement to pay interest on them.
Publication 515 states the withholding side of the same fact, for the payer.
Foreign persons are not subject to chapter 3 withholding on interest that is not connected with a U.S. trade or business if it is from: Deposits with persons carrying on the banking business; Deposits or withdrawable accounts with savings institutions chartered and supervised under federal or state law as savings and loan or similar associations, such as credit unions, if the interest is or would be deductible by the institutions; or Amounts left with an insurance company under an agreement to pay interest on them.
Second, portfolio interest, where the exemption and its limit are published together and are quoted here together.
Interest and OID that qualifies as portfolio interest are not subject to chapter 3 (of the Internal Revenue Code) withholding under sections 1441 through 1443. However, such interest may be subject to withholding if it is a withholdable payment, and there is no exception to chapter 4 (of the Internal Revenue Code) withholding under sections 1471 through 1474. For more information, see the discussion of portfolio interest under Withholding on Specific Income in Pub. 515.
Qualifies is doing the work in that sentence, and the IRS names the limits rather than leaving them implied.
Payments to certain persons and payments of contingent interest do not qualify as portfolio interest. You must withhold at the statutory rate on such payments unless some other exception, such as a treaty provision, applies and withholding under chapter 4 does not apply.
The one asset class with a regime of its own
US real property sits outside everything above, under its own statute.
The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the U.S. to tax foreign persons on dispositions of U.S. real property interests.
The mechanic that catches sellers is the base the withholding is computed on.
The transferee must deduct and withhold a tax on the total amount realized by the foreign person on the disposition. The rate of withholding generally is 15% (10% for dispositions before Feb. 17, 2016).
The total amount realised, not the gain. On a sale at a loss there is still an amount realised.
Two buckets, two rules, and the exemptions printed thousands of words before the rate. That is the whole subject.
Book Your Assessment CallWhat this page will not tell you
Whether you are a nonresident alien. That is a status question with two tests of its own, and they are quoted on their own page rather than applied to anyone here.
Your treaty rate. A treaty can reduce or remove the 30 percent, and the rate lives in the treaty and the IRS's own treaty tables rather than in any general publication. No country rate appears on this page. The form that carries a treaty claim is a separate subject with separate conditions.
Whether nonresident aliens are taxed more. No IRS page read for this guide makes that comparison. The honest answer is structural: one system is graduated on the net with deductions, the other is flat on the gross with none, and which produces more depends entirely on what the income is.
What you owe. That turns on facts a page cannot see, and on the country on the other side of it.
The quotations above come from six IRS sources, and all six are linked here so any of them can be checked: Publication 519, Publication 515, taxation of nonresident aliens, effectively connected income, FDAP income and FIRPTA withholding.
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FAQ
How are nonresident aliens taxed by the US?
Can I deduct expenses against the 30 percent?
Are capital gains taxed?
Is that the same 183 days as the residency test?
Does trading US stocks make me engaged in a US trade or business?
Is interest on a US bank account taxed?
What about selling US property?
Are nonresident aliens taxed more than US residents?
The structure decides the bucket
Which bucket income falls into is a consequence of how things are set up: the entity, the accounts, where you are resident. First Class Citizen's work is that sequence, and the call starts with where you actually stand in it.
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