@fjhaypainter wrote:
It is an offshore trading account. They are saying that per IRS and trading company rules, I have to pay the taxes separately , and the trading company will connect with IRS to get it paid. They cannot deduct it directly from my trading account.
is this typical for offshore trading accounts?
Generally speaking, a payer may be required to withhold some of your proceeds for income taxes. This is called backup withholding, and the money is sent to the IRS in your name and counts as a tax payment for the year. When you file your return, you will report the income as taxable income, and you will include the backup withholding as a tax payment. If your overall payments are too high, you get the difference as a refund; if the payments are not enough to cover the tax, you will owe an additional payment.
https://www.irs.gov/taxtopics/tc307
The actual tax you will owe on any withdrawal depends on the type of activity. Capital gains are taxed as regular income for short term gains (investments held less than a year) and at a lower rate for long term investments held more than 1 year. Interest and dividends are usually taxed as ordinary income. You usually pay some income tax on interest and dividends in any year they are paid, even if you don't withdraw them, but you don't pay tax again when you withdraw. You pay tax on capital investments when you sell them (cash out), and you can determine what your gain is. Your broker should be sending you a 1099-B, a 1099-INT and a 1099-DIV (or a "combined tax statement") every year, that you include on your income taxes.
I don't know exactly what rules require a broker to withhold backup taxes. Have you provided them with your social security number? If you refused, they will definitely need to withhold backup taxes.
If you want to know if your broker is behaving in a legitimate manner, I would ask if you have been getting proper tax statements each year (your statement for all 2021 activities was due January 31, 2022, although they are often late if the investments are complex). If you had this account last year, did they send you a statement? Will they remove the tax requirement if you provide their social security number? It seems unusual for them to want the tax payment in cash rather than taking it out of the proceeds of your account.
But on the other hand, you're kind of stuck, aren't you? It' an offshore account, which you picked for some reason (tax advantages, secrecy, etc) and your other option is to leave the money there forever, isn't it?
