Investing from USA

Bostonerimus1

EdSwippet said:

Bostonerimus1 said:

... He should also be able to invest in an ISA, without any nasty US tax consequences, as long as he follows the UK rules.

Not entirely - after all, this is the US.

Even though F and J visa holders avoid becoming full US 'tax residents' (exempt from the 'substantial presence test'), the US still has some nasty tax traps in place for them. The one most likely to bite is a flat 30% tax on all realised capital gains; which would of course include any sales inside a UK ISA that generate a capital gain, because the US doesn't recognise ISAs as any form of tax shelter.

US tax for nonresidents is a total minefield.

The scenario I was thinking about was that the OP is on an F-1 and only in the US for two years so they should be non-resident for tax purposes and they should only be taxed on US source income and gains. But yes it's a minefield and the OP's son should get their exact status verified by the college or university they will be attending. 

EdSwippet

Bostonerimus1 said:
The scenario I was thinking about was that the OP is on an F-1 and only in the US for two years so they should be non-resident for tax purposes and they should only be taxed on US source income and gains. But yes it's a minefield and the OP's son should get their exact status verified by the college or university they will be attending. 

Please read the link I posted carefully. In the scenario you describe, the OP's son will face 30% US tax on any capital gains realised inside (or outside) an ISA.

The US is sneaky in how it applies this tax. In this case, it is "US source" because the OP's son's "tax home" has become the US, courtesy of a separate 183 day rule (one that is unconnected with the 'substantial presence test'). That is, the "source" of the capital gain is where the person is, not where the asset is.

The IRS puts this much more bureaucratically (of course):

A flat tax of 30 percent (or lower treaty) rate is imposed on U.S. source capital gains in the hands of nonresident individuals present in the United States for 183 days or more during the taxable year. This 183-day rule bears no relation to the 183-day rule under the substantial presence test of IRC section 7701(b)(3). This rule applies even if any of the transactions occurred while you were not in the United States.
...
Gain or loss from the sale or exchange of personal property generally has its source in the United States if the nonresident has a tax home in the United States. The key factor in determining if an individual is a U.S. resident for purposes of the sourcing of capital gains is whether the individual’s "tax home" has shifted to the United States. ...

In general, under the "tax home" rules, a person who is away (or who intends to be away) from his tax home for longer than 1 year has shifted tax homes to his new location upon his arrival in that new location. 

See also this article, written specifically for G visa holders, but applicable also to F and J (student) visas.

Bostonerimus1

EdSwippet said:

Bostonerimus1 said:
The scenario I was thinking about was that the OP is on an F-1 and only in the US for two years so they should be non-resident for tax purposes and they should only be taxed on US source income and gains. But yes it's a minefield and the OP's son should get their exact status verified by the college or university they will be attending. 

Please read the link I posted carefully. In the scenario you describe, the OP's son will face 30% US tax on any capital gains realised inside (or outside) an ISA.

The US is sneaky in how it applies this tax. In this case, it is "US source" because the OP's son's "tax home" has become the US, courtesy of a separate 183 day rule (one that is unconnected with the 'substantial presence test'). That is, the "source" of the capital gain is where the person is, not where the asset is.

The IRS puts this much more bureaucratically (of course):

A flat tax of 30 percent (or lower treaty) rate is imposed on U.S. source capital gains in the hands of nonresident individuals present in the United States for 183 days or more during the taxable year. This 183-day rule bears no relation to the 183-day rule under the substantial presence test of IRC section 7701(b)(3). This rule applies even if any of the transactions occurred while you were not in the United States.
...
Gain or loss from the sale or exchange of personal property generally has its source in the United States if the nonresident has a tax home in the United States. The key factor in determining if an individual is a U.S. resident for purposes of the sourcing of capital gains is whether the individual’s "tax home" has shifted to the United States. ...

In general, under the "tax home" rules, a person who is away (or who intends to be away) from his tax home for longer than 1 year has shifted tax homes to his new location upon his arrival in that new location. 

See also this article, written specifically for G visa holders, but applicable also to F and J (student) visas.

The "tax home" is key and so the OP's son should talk to the University Student office for advice on their status given they have a 2 year Masters. When that is known they can decide whether or not to sell all UK funds outside of pensions to avoid the US 30% tax and PFIC issues.