We wrote about the new US withholding tax for PTP securities back in November 2022. The tax is currently in force. However, we recently got to know that there are exemptions on certain securities as long as they issue a "Qualified Notice". You can refer to this note from Interactive Brokers. https://ibkr.info/tag/tax-reporting
Summary Of Interactive Brokers' Note
First of all, the note confirms the nature of the 10% withholding tax with an example given. The withholding tax applies to the entire sales proceed and not just the calculated profits.
Example of PTP withholding: Buy 200 shares @ 50. Transaction value = $10,000 Sell 200 shares @ 51. Transaction value = $10,200 Profit = $200. Withholding = $1020 USD
Assuming no tax reclaim requests, the loss in value to the investor would be $820
However, the IRS provides issuers the ability to get an exemption from the PTP withholding requirement. The exemption is valid for 92 days, and issuers are required to re-certify with the IRS to extend the duration of the exemption. The issuer document that provides for a withholding exemption is generally referred to as a "Qualified Notice".
Implications For Volatility Trading
Several volatility ETFs are PTP securities. They include SVXY, SVIX, and VIXY. However, the issuers for all these ETFs have issued a "Qualified Notice". Hence, they are exempted from the withholding tax. As a result, non-US citizens can continue to trade these ETFs without paying the withholding tax. However, do take note that the exemption is only valid for 92 days, and issuers are required to re-certify with the IRS to extend the duration of the exemption. Therefore, the risk is if the issuer did not extend the exemption and you are not aware, you might end up having to pay the withholding tax unwittingly. Brokers will publish on a best-effort basis the updated list of exemptions but they are not responsible for accuracy.
Therefore, for those who want to be 100% certain that they are not caught unexpectedly by the withholding tax, it is still best to steer clear of these ETFs. However, if you want to trade these ETFs, you can do so but be aware that you need to check the exemption status every quarter. Of course, this is provided your broker allows you to trade these ETFs in the first place.
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