How an 🇺🇸 Expat can Invest while Avoiding 🇺🇸 Tax Hell
🇺🇸 Expat investing sucks because of 🇺🇸 tax laws. Here's a way around some of the barriers.
Why 🇺🇸 Expat investing sucks
🇺🇸 tax laws make investing very difficult for the 🇺🇸 expat. The following thread explains why and how to work around the barriers.
Savings accounts, GICs and bonds earn very little because of low interest rates.
The main alternative is to invest in stocks, which often pay dividends and may increase in value at the same time.
A stock-based financial product, the exchange traded fund (ETF), is now widely used as a convenient substitute for the ownership of individual stocks.Â
An ETF is a basket of stocks that is subdivided into many shares, shares that are sold as stocks on major stock markets.
ETFs are popular because an investor can buy a few ETF shares to get a diversified portfolio at a very low cost.Â
To invest in 🇺🇸 ETFs and similar products, you need to have a brokerage account.
An expat likely has no 🇺🇸 address and will find it difficult to open a 🇺🇸 brokerage account.
A convenient alternative is to buy a local (non-🇺🇸) ETF through a local (to your country of residence) brokerage firm.
Investment problem solved … but wait… 🇺🇸 tax policies will torpedo you.
 To the IRS, a non-🇺🇸 ETF is a foreign ETF, and foreign is suspect in their eyes.
So owners of shares in a non-🇺🇸 ETF must file Form 8621 with their 1040 tax return.Â
Completing it will cost you $100s if done by a tax accountant.
DIY? Fuggetaboutit. Form 8621 is inexplicable to the non-professional.
Doing it yourself will take dozens of hours and you’ll have no idea what you’ve done.
The tax-prep costs for the 8621 clearly outweigh the low-cost advantages of ETFs.
Given the above problems, trading stocks outside an ETF might be the answer. But isn’t trading individual stocks a pain? It used to be, but is it still?
In the past…
…trading stocks was intimidating, difficult, and expensive to do yourself, and here’s why:
Trading was very expensive, a $30 transaction fee to make a single trade.
You had to trade by phoning a broker, who worked on trade-based commissions and encouraged lots of trading.
Trades were largely restricted to 100-share lots, so @$40/share you had to commit $4000 to owning the shares of one company.
When a single stock cost $1000s, creating a diversified portfolio required considerable wealth.
Getting information about companies wasn’t easy; you had to rely on your broker or spend hours in the library.
In general, individual traders had to have lots of time and a fair bit of money.
But now…
…computers and the internet have upended the world of direct stock trading.
Share trading is much less expensive, a few $/trade or even free.
Now brokers are rarely involved; online trading is done from your PC or phone.
You can buy/sell as few as 1 or 2 shares of a company; fractional shares in some cases.
Reduced fees and increased flexibility means that portfolio diversification with multiple companies is possible with a modest investment nest egg.
Online sources of information are plentiful, free, and accessible.
In sum, it’s now possible to inexpensively create a diversified portfolio of stocks with a modest financial stake.
What these changes mean
An 🇺🇸 Expat of modest means can afford to invest directly in ownership of publicly traded companies in their home country.
Income from stock ownership (capital gains, losses, & dividends) does not require Form 8621.
There are existing, successful stock trading strategies suitable for busy people who need a largely hands-off approach.
What to do
The steps needed to create an investment portfolio while avoiding Form 8621 follow. Two portfolio creation strategies are described.
Open an online brokerage account
Because low transaction fees are important, consider discount brokers that trade on your country’s major stock exchange.
Open an account that has low or no trading fees (these are increasingly common).
An account that allows fractionial share ownership is ideal (but uncommon), particularly if you have a small amount to invest.
Transfer funds from your bank to the brokerage account.
Once you have a funded account, you’re ready to trade.
There are many approaches to stock trading.
Don’t have a lot of time? Here are 2 buy-and-hold strategies for trading stocks.
Copy the managers
This strategy is based on the fact that ETFs publicly list their top stock picks. You can piggyback on their research. Use the lists from several ETFs to create a personal composite list from which to select 10 individual stocks to purchase.
Identify multiple ETFs that share your investment goals, such as growth or dividend income.
Create a list of 10 or more candidate stocks from the top 10 holdings of the successful ETFs.
Do not consider any .UN and .REIT stocks from the lists because their ownership will trigger Form 8621.
Remove any companies you object to owning for philosophical or ethical reasons.
For each remaining stock on the list, create a popularity score by counting how many ETFs had it in their top 10.
Select the 10 most popular-with-ETF-manager stocks.
Allocate 10% of your investment stake to buy each of the 10 most popular stocks.
Once a year repeat this list-building steps to create an updated list.
Sell the stocks that have dropped off or down the list and buy their replacements.Â
The 2-Minute Portfolio
This strategy has averaged an annual return of 10% over 30 years on the major Canadian stock market. It emphasizes diversification and large companies that pay dividends.
Use a stock screening tool such as Yahoo Finance to implement the following steps.
Within each of the 11 market Sectors, rank order dividend paying stocks by market capitalization from largest to smallest.Â
Exclude any .UN and .REIT stocks (they trigger Form 8621).
Exclude any companies you don’t want to own for philosophical or ethical reasons.
Within each sector, select the 2 top stocks based on market capitalization size.Â
Allocate ~4.5% of your funds for purchasing each of the 22 stocks (2 per each 11 sectors) on your list.
To update your portfolio, repeat these steps once a year.
Sell the stocks that no longer qualify and buy their successors.
Conclusion
Direct ownership of individual stocks does not trigger Form 8621, which imposes discouraging tax preparation costs on equity investments by 🇺🇸 expats.
Changes in the investment landscape have made direct stock trading much easier and cheaper for the small investor
Minimal trading costs enable 🇺🇸 expats of modest means to invest in equities through direct stock trading.
Several portfolio creation strategies based on direct stock trading are outlined. These strategies can produce income in the form of dividends and growth in the form of capital gains.
Until next time,
🇺🇸 Expat Advisor
Disclaimer
The content in my tweets, newsletter, and website is for informational purposes only. It is not intended to be investment, tax, or professional advice.
Before acting on this content you should consult a professional.Â
References to third parties are not endorsements.Â
When you invest, your money is at risk, and you may lose some or all of your investment.
Past performance is not a guarantee of future results. Historical returns, hypothetical returns, expected returns and images included in this content are for illustrative purposes only.Â