International Taxation For Americans Abroad

“Kathleen, if I play the stock market while residing in Panama, would I have to pay U.S. income tax on winnings?”

— Karyn T., Panama

A resident international tax expert replies:

This is a complex issue. The bottom line is this: If you are a “professional” trader as defined by the IRS, you can operate your business through an offshore corporation, draw a salary of up to US$91,500, and retain the rest of your profits in the company. A clear (indisputable) example of a professional is someone who spends eight hours per day, five days per week, trading, researching, and working at his (or her) craft.

Conversely, if you invest in the market as a hobby (an “investor” in IRS parlance), spending just a few hours each week or month, you are not a professional. As a casual investor living abroad, your trades are reported and taxed on Schedule D of your U.S. tax return, just as they would be if you were living in the United States.

The above example of the professional trader is a simplified one. Most people who hope to be classified as professional investors fall short of this clear-cut description. Careful consideration, planning, and documenting of your time is required to determine if you can be classified as a professional.

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