The withholding rate your broker takes off the top depends on who you are to the IRS. For nonresident foreign investors, the default brokerage withholding tax rate is 30 percent on U.S.-source dividends, interest, and other passive income, though a tax treaty can cut that sharply. For U.S. citizens and resident aliens, the broker withholds nothing on ordinary payments unless backup withholding is triggered, in which case the rate is 24 percent.
The 30 Percent Default for Foreign Investors
When a brokerage pays dividends, interest, rent, annuities, or most other recurring U.S.-source income to a nonresident alien or foreign corporation, it must withhold 30 percent of the gross payment before anything reaches the investor.1Office of the Law Revision Counsel. 26 USC 1441 – Withholding of Tax on Nonresident Aliens The same 30 percent rate applies to foreign corporations under a parallel provision.2Office of the Law Revision Counsel. 26 USC 1442 – Withholding of Tax on Foreign Corporations
The withholding hits the full amount with no deductions for expenses or losses. A $1,000 dividend paid to a foreign investor becomes $700 in the account; the broker sends the other $300 to the Treasury. Because the broker is personally on the hook for any tax it should have collected, most err on the side of full withholding whenever the paperwork is incomplete.
Capital Gains Sit Outside the Rule
Gains from selling stocks, bonds, or other securities are generally not subject to the 30 percent withholding. A nonresident alien who buys shares on a U.S. exchange and sells them at a profit typically owes no U.S. tax on that gain, provided they were present in the country fewer than 183 days during the calendar year.3Internal Revenue Service. Federal Income Tax Withholding and Reporting on Other Kinds of U.S. Source Income Paid to Nonresident Aliens The 30 percent rate targets passive, recurring income, not trading gains. That distinction changes the math on high-dividend versus growth-oriented holdings for foreign investors.
How Tax Treaties Lower the Foreign Rate
The United States has income tax treaties with dozens of countries, and many reduce or eliminate the 30 percent default on specific income types. Treaties with Australia, Canada, Germany, and the United Kingdom, for example, typically drop the rate on portfolio dividends to 15 percent, with a 5 percent rate for large corporate shareholders.4Internal Revenue Service. Table 1 – Tax Rates on Income Other Than Personal Service Income Under Chapter 3, Internal Revenue Code, and Income Tax Treaties Interest is often reduced to zero or a nominal rate.5Internal Revenue Service. Tax Treaty Tables
Treaty benefits are not automatic. You have to file the correct withholding certificate with your broker and satisfy a limitation-on-benefits test, an anti-abuse provision that prevents residents of countries without a favorable treaty from routing investments through a treaty country to grab a lower rate.5Internal Revenue Service. Tax Treaty Tables
The 24 Percent Backup Withholding Rate for U.S. Investors
U.S. citizens and resident aliens do not face the 30 percent foreign rate. Their brokerage income is reported to the IRS and taxed through the normal return process, with nothing withheld at payment. The exception is backup withholding, a 24 percent rate the broker must apply when it cannot verify your identity or the IRS flags a compliance problem.6Internal Revenue Service. Backup Withholding The rate is permanently set at 24 percent.7Internal Revenue Service. 2026 Publication 15
Four situations trigger it:
- You failed to provide your Social Security number or other taxpayer identification number to the broker.
- The IRS notified the broker that the TIN you provided does not match its records.
- The IRS determined you underreported interest or dividend income on a prior return and sent at least four notices over 120 days before directing the broker to begin withholding.
- You did not certify under penalty of perjury that you are not subject to backup withholding.
Once any of these is active, the broker has no discretion to waive the requirement.8Office of the Law Revision Counsel. 26 USC 3406 – Backup Withholding Backup withholding applies to most payments that brokers report on Form 1099, including proceeds from securities sales, dividends, and interest.6Internal Revenue Service. Backup Withholding
The straightforward way to avoid it: complete Form W-9 accurately when you open your account, and respond promptly if your broker sends a notice about a TIN mismatch.
The Form You File Determines Your Rate
Your withholding rate is set almost entirely by the documentation on file with your broker.
Form W-9 for U.S. Persons
U.S. citizens and resident aliens submit Form W-9 to certify their status, provide a correct TIN, and confirm they are not subject to backup withholding. You sign under penalty of perjury.9Internal Revenue Service. Form W-9 – Request for Taxpayer Identification Number and Certification With a valid W-9 on file, the broker pays your full earnings and reports them to the IRS without withholding.10Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification
Form W-8BEN for Foreign Individuals
Nonresident alien individuals file Form W-8BEN to establish foreign status and claim any treaty rate. The form asks for your foreign tax identification number, your country of residence, and the specific treaty article you rely on for a reduced rate.11Internal Revenue Service. Claiming Tax Treaty Benefits Without a valid W-8BEN, the broker defaults to the full 30 percent on all eligible payments.
A W-8BEN generally remains valid through the last day of the third calendar year after you sign it. A form signed in June 2026 expires on December 31, 2029. Under certain conditions it can remain valid indefinitely, but any change in circumstances, such as moving to a different country, requires a new form within 30 days.12Internal Revenue Service. Instructions for Form W-8BEN – Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) Letting the form lapse is one of the most common reasons foreign investors suddenly see the full 30 percent withheld on payments that had been taxed at a treaty rate.
Form W-8BEN-E for Foreign Entities
Foreign corporations, trusts, and other entities use Form W-8BEN-E instead of the individual version. The entity form covers the same ground but adds sections for FATCA classification and the limitation-on-benefits analysis required by most treaties.13Internal Revenue Service. Form W-8BEN-E – Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)
A 10 Percent Rate on Publicly Traded Partnership Sales
Sales of publicly traded partnership interests trigger a separate withholding rule that catches foreign investors off guard. When a foreign person sells a PTP interest through a broker, the broker withholds 10 percent of the total sale proceeds, not just the gain.14eCFR. 26 CFR 1.1446(f)-4 – Withholding on the Transfer of a Publicly Traded Partnership Interest Sell $50,000 of PTP units on a $3,000 gain, and the broker still withholds $5,000. The excess comes back on a U.S. tax return, but the cash is tied up in the meantime.
There is an exception. If the PTP certifies through a qualified notice that less than 10 percent of its gain would be effectively connected with a U.S. trade or business, brokers can skip the withholding entirely.14eCFR. 26 CFR 1.1446(f)-4 – Withholding on the Transfer of a Publicly Traded Partnership Interest Some partnerships issue these notices quarterly.
FATCA Withholding on Non-Compliant Intermediaries
The Foreign Account Tax Compliance Act imposes its own 30 percent withholding on payments made to foreign financial institutions that do not participate in FATCA reporting.15Internal Revenue Service. Withholding and Reporting Obligations If your foreign bank or custodian has not signed a FATCA agreement with the IRS, payments routed through that institution can be hit with the full 30 percent regardless of treaty benefits. Most major international financial institutions are FATCA-compliant, so this layer mainly affects investors using smaller or less established intermediaries.
Getting Over-Withheld Tax Back
If your broker withheld more than you actually owe, you claim the excess by filing a U.S. tax return. Nonresident aliens file Form 1040-NR.16Internal Revenue Service. Taxation of Nonresident Aliens This comes up often when a W-8BEN was not filed in time and the broker defaulted to 30 percent even though a treaty rate applied. Schedule NEC reports income not connected with a U.S. business, and Schedule OI is where you indicate you are claiming treaty benefits.17Internal Revenue Service. About Form 1040-NR, U.S. Nonresident Alien Income Tax Return
Timing matters. To preserve your right to deductions and credits, you must file the return within 16 months of its original due date. Miss that window and the IRS can deny the refund entirely.16Internal Revenue Service. Taxation of Nonresident Aliens If you are claiming a treaty-based position that reduces or eliminates your tax, you may also need to attach Form 8833 to disclose that position.18Internal Revenue Service. About Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)
U.S. investors hit with backup withholding reclaim the excess through their regular Form 1040. The withheld amount appears as a credit against total tax liability, and any overpayment comes back as a refund.