How Foreign Stocks Are Taxed for US Investors

For a US citizen or resident, foreign stocks are taxed on worldwide income the same way domestic holdings are, with dividends taxed at either qualified rates (0%, 15%, or 20%) or ordinary rates up to 39.6% in 2026, capital gains taxed on the usual short- and long-term schedule after converting each trade to US dollars, and foreign tax withheld at the source generally recoverable through the Foreign Tax Credit.¹² On top of the income tax, two separate disclosure regimes may apply to accounts held outside the United States, and one specific type of holding — foreign-domiciled funds — triggers a punitive regime that can consume half of a gain.

Dividends: Qualified or Ordinary

The dividend rate hinges on whether the payer is a “qualified foreign corporation” and whether you held the stock long enough. All three of the following must be true for the lower rate:

The company is incorporated in a US possession, is eligible for benefits under a comprehensive US income tax treaty that includes an information-exchange program, or its stock is readily tradable on an established US securities market (which covers most ADRs on the NYSE or Nasdaq).
You held the shares at least 61 days during the 121-day window that starts 60 days before the ex-dividend date.
The company was not a passive foreign investment company in the dividend year or the year before.

Miss any one and the dividend is ordinary income, taxed at rates that top out at 39.6% in 2026 after the Tax Cuts and Jobs Act expiration.¹ Stocks in countries without a US income tax treaty — Brazil, Singapore, Hong Kong, and the United Arab Emirates among them — generally produce non-qualified dividends unless they trade on a US exchange.³ If your ordinary dividends exceed $1,500 for the year, they go on Schedule B of Form 1040.⁴

Foreign Withholding at the Source

Before a dividend reaches your account, the foreign country typically takes its cut. Without a treaty, the statutory rate is usually around 30%. US treaties often reduce that to 15% for portfolio investors, and some go lower — Japan and Mexico apply 10% on portfolio dividends.⁵ You still report the full gross dividend on your US return, then recover the withholding through the Foreign Tax Credit.

The 3.8% Surtax

Once your modified adjusted gross income passes $200,000 (single) or $250,000 (married filing jointly), foreign dividends and gains pick up an extra 3.8% net investment income tax.⁶ Those thresholds are not indexed for inflation. Foreign tax credits cannot offset the NIIT, so above those income levels a slice of double taxation is effectively unavoidable.

Capital Gains and the Currency Wrinkle

Gains on foreign stocks follow the domestic schedule. Held a year or less, the gain is short-term and taxed at ordinary rates. Held longer, it is long-term at 0%, 15%, or 20%, with the 3.8% NIIT layered on for higher-income taxpayers.²

The complication is currency. Both your purchase price and your sale proceeds have to be converted to US dollars using the exchange rate on each trade date. A stock that was flat in its home currency can produce a taxable gain if the foreign currency strengthened against the dollar during your holding period, or a deductible loss if it weakened. The gain or loss goes on Form 8949 and Schedule D, and you need records of the exchange rates you used.⁷

The IRS treats the stock itself as separate from the currency used to buy it. Buying foreign-currency-denominated stock is not a “Section 988 transaction,” so the entire result, including the currency-driven portion, stays a capital gain or loss rather than ordinary income. If you hold foreign currency in a brokerage account and later convert it to dollars on a different date than when you acquired it, that conversion can itself trigger ordinary income or loss under Section 988.⁸

Recovering Foreign Tax With the Foreign Tax Credit

When a foreign government withholds tax on your dividends, you can claim a dollar-for-dollar credit against your US tax by filing Form 1116.⁹ The credit almost always beats taking an itemized deduction, because a deduction only shrinks taxable income while a credit reduces the tax itself.

The credit has a ceiling. It cannot exceed the US tax you would have owed on that same foreign-source income, computed as your total US tax multiplied by the ratio of foreign taxable income to worldwide taxable income.¹⁰ When a foreign rate exceeds your effective US rate on that income, the excess doesn’t disappear — it carries forward or back — but it isn’t usable in the current year.

Smaller investors get a shortcut. If your total creditable foreign taxes for the year are $300 or less, or $600 or less on a joint return, you can claim the credit directly on your Form 1040 without filing Form 1116.¹¹ Most people whose only foreign exposure is US-based mutual funds or ETFs will fall under that limit, since the fund reports their share of foreign taxes on Form 1099-DIV.

The PFIC Trap

Buying a foreign-domiciled fund is where US investors get hurt worst, and often without warning. A passive foreign investment company is any foreign corporation where 75% or more of gross income is passive (interest, dividends, rents, royalties) or at least 50% of assets produce or are held to produce passive income.¹² That definition captures virtually every foreign-domiciled mutual fund, ETF, and investment trust. A Vanguard international fund is fine because it’s a US fund. A locally managed fund bought while living in London or Sydney is almost certainly a PFIC.

Under the default “Section 1291” regime, when you receive an “excess distribution” (broadly, one that exceeds 125% of your average distributions over the prior three years) or sell at a gain, the IRS allocates the income ratably across every day you held the shares. Each year’s allocated slice is taxed at the highest marginal rate for that year — 39.6% for 2026 — and then an interest charge is layered on as if you had underpaid tax in every prior year.¹³ The combined hit can easily consume half or more of your gain.

Two elections avoid the default, but both require action before you’re stuck. A Qualified Electing Fund election has you include your pro rata share of the fund’s ordinary earnings and net capital gains each year whether or not you received a distribution; it preserves capital gain character and avoids the interest charge, but it depends on the fund providing an annual information statement, which many foreign funds refuse to do for US investors. A mark-to-market election has you pick up the year-end increase in fair market value as ordinary income, with decreases deductible only against prior mark-to-market gains, and requires the stock to be traded on a recognized exchange.

Either way, you file Form 8621 for each PFIC you own, a form complex enough that professional preparation typically runs $75 to $225 per fund.¹⁴ For a small foreign holding, that alone can wipe out the return.

Reporting Foreign Accounts

Holding foreign stocks in an account outside the United States can trigger two separate disclosure regimes, run by different agencies, with different thresholds. Filing one does not satisfy the other, and many investors owe both.

FBAR (FinCEN Form 114)

If the combined value of your foreign financial accounts exceeded $10,000 at any point in the year, you file a Report of Foreign Bank and Financial Accounts.¹⁵ Foreign brokerage accounts holding stocks count. The threshold applies in aggregate, so two accounts of $6,000 each cross it.

The FBAR is filed electronically through FinCEN’s BSA E-Filing System, not with your tax return, and it’s due April 15 with an automatic extension to October 15.¹⁶ You file it even if the accounts made no money. Non-willful civil penalties, adjusted for inflation, now exceed $16,000 per account, per year. Willful violations carry the greater of roughly $100,000 (inflation-adjusted) or 50% of the account balance, plus possible criminal prosecution.¹⁵

Form 8938 (FATCA)

Form 8938 is filed with your income tax return, and the thresholds depend on filing status and whether you live in the US or abroad:

Living in the US, single: assets over $50,000 on the last day of the year or $75,000 at any time.
Living in the US, married filing jointly: $100,000 on the last day or $150,000 at any time.
Living abroad, single: $200,000 on the last day or $300,000 at any time.
Living abroad, married filing jointly: $400,000 on the last day or $600,000 at any time.

¹⁷

There is one carve-out that matters for most domestic investors: foreign stocks held inside a US brokerage account are not Form 8938 assets. The US institution already reports them to the IRS.¹⁸ Form 8938 targets assets held directly with foreign institutions.

Failure to file Form 8938 carries a $10,000 penalty, with up to $50,000 more for continued non-compliance after IRS notification. A 40% accuracy-related penalty attaches to any tax understatement traced to undisclosed foreign assets, and the statute of limitations on your entire return stretches to six years if you omit more than $5,000 in income from a specified foreign financial asset.¹⁷

How You Buy Changes What You Owe and File

The route into foreign markets determines how much of the tax and reporting machinery you touch.

American Depositary Receipts are the simplest path. A US depositary bank buys the foreign shares and issues dollar-denominated certificates that trade on the NYSE or Nasdaq.¹⁹ You trade them like domestic stocks. The bank handles custody and currency. Most large ADRs meet the “readily tradable on a US exchange” test for qualified dividends, and because your account is with a US broker, neither the FBAR nor Form 8938 applies to those positions.

US-domiciled international ETFs and mutual funds deliver broad foreign exposure with a standard Form 1099 at year-end showing dividends and your share of foreign taxes paid.²⁰ Your extra work is deciding whether to claim the Foreign Tax Credit. The important distinction is that a US-domiciled international fund is not a PFIC, while a foreign-domiciled fund almost certainly is.

Direct purchase on a foreign exchange is the fullest exposure. You need a broker that supports international trading, the trade settles in local currency, you carry the currency-conversion records for capital gains, the FBAR and Form 8938 may come into play, and dividends may not qualify for the lower rate unless a treaty covers the issuing country. It suits investors with a specific thesis on a company not reachable through ADRs or US-listed funds.

Gifts and Inheritances of Foreign Stock

If you receive gifts or bequests from a nonresident alien individual or a foreign estate totaling more than $100,000 during the year, you report them on Form 3520. The threshold for gifts from foreign corporations or partnerships is much lower, around $20,000 with annual inflation adjustment.²¹ Form 3520 is a disclosure, not a tax payment. Missing it carries a penalty of 5% of the gift’s value per month, capped at 25%.

Inherited foreign stock generally receives a stepped-up basis to fair market value on the date of the decedent’s death.²² The practical task is documenting that value in dollars — the closing price on a foreign exchange converted at that day’s rate — and keeping both numbers on file for a possible audit. Separately, the US has estate or gift tax treaties with about 16 countries, including the United Kingdom, Germany, Japan, Canada, and France; where no treaty exists, coordinating the two countries’ estate taxes gets complicated.²³

1
Congressional Research Service. Expiring Provisions in the Tax Cuts and Jobs Act (TCJA, P.L. 115-97)
2
Congressional Budget Office. Raise the Tax Rates on Long-Term Capital Gains and Qualified Dividends by 2 Percentage Points
3
Internal Revenue Service. United States Income Tax Treaties – A to Z
4
Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions
5
Internal Revenue Service. Tax Treaty Table 1 – Tax Rates on Income Other Than Personal Service Income
6
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
7
Internal Revenue Service. Instructions for Form 8949 (2025)
8
Office of the Law Revision Counsel. 26 US Code 988 – Treatment of Certain Foreign Currency Transactions
9
Internal Revenue Service. Foreign Tax Credit
10
Internal Revenue Service. Foreign Tax Credit – How to Figure the Credit
11
Internal Revenue Service. Instructions for Form 1116
12
Office of the Law Revision Counsel. 26 US Code 1297 – Passive Foreign Investment Company
13
Office of the Law Revision Counsel. 26 US Code 1291 – Interest on Tax Deferral
14
Internal Revenue Service. Instructions for Form 8621
15
Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)
16
Financial Crimes Enforcement Network. How Do I File the FBAR?
17
Internal Revenue Service. Summary of FATCA Reporting for US Taxpayers
18
Internal Revenue Service. Basic Questions and Answers on Form 8938
19
U.S. Securities and Exchange Commission. American Depositary Receipts (ADRs)
20
U.S. Securities and Exchange Commission. Form 1099, Investment Income (Interest and Dividends)
21
Internal Revenue Service. Gifts From Foreign Person
22
Internal Revenue Service. Gifts and Inheritances
23
Internal Revenue Service. Estate and Gift Tax Treaties (International)