US withholding tax on derivatives - 871 (m)

Learn more about the new regulation and what it could mean for you...

• What is Section 871(m)?
• Which products are affected?
• Which positions does this apply to?
• What do I need to do?
• What does IG do with my information?

What is Section 871(m)?

The IRS issued regulations under Section 871(m) to ensure that non-US holders of US equity derivatives – including and CFDs – are taxed on dividend income in the same way as non-US holders of the underlying equities. The new regulations achieve that by deeming 'dividend-equivalent payments' arising on derivatives over US equities to be US-source dividend income.

An individual would be subject to 30% withholding tax under normal US rules. However, a US-Australia tax treaty exists which entitles an Australian tax resident to pay only 15% withholding tax. This means an Australian tax resident would receive a net payment equal to 85% of the dividend-equivalent payment, as opposed to 70%.

Which products are affected?

This withholding applies to CFDs on shares in US incorporated companies, ETFs and non-qualified indices which contain US equities. 
There will, however, be an exemption for CFDs on qualified indices, such as:

• Dow Jones Industrial Average
• S&P 500
• NASDAQ 100
• Russell 2000

The rules apply to contracts with a delta of 0.8 or greater, relative to a US underlying. However, guidance from the IRS allows a phased-in approach such that only 'delta one' products will be in scope for 2017. This is only for CFD contracts.

Which positions will this apply to?

The rules apply to any in-scope positions opened on or after 1 January 2017. 

What do I need to do?

If you want to trade on US equities from any of your IG accounts, you’ll need to complete and return a simple form. Most clients can complete the form electronically, and file it with us in a minute or two. Please do this before any income event, such as a dividend adjustment, to avoid paying too much withholding tax. 

Which form you use depends on individual circumstance — either a W-8BEN form or W-9 form. Each form is valid for the remainder of the year it is signed, plus three full years after that. We will notify you when your form needs to be recertified. 

If you’re not an institutional client, joint account holder or US citizen, just follow these steps:

Log in to your IG account with your web browser

1. Go to the ‘settings’ tab in My IG
2. Select ‘trading US stock’
3. Answer a few questions about your tax status and e-sign the form

This will complete the form electronically, and file it with us. The whole process should only take a minute or two.

Alternatively if you are an individual US citizen or taxpayer you can access a W-9 form here.

Why do I need to do this?

Withholding-tax documentation, including W-8BEN/W-9 forms, are required under IRS rules. They allow us to apply the preferential treaty rate to dividend-equivalent payments where applicable. By completing the relevant form, the amount of withholding tax you'll pay on your dividends could reduce from 30% to 15%.

In the absence of the required documentation, we will withhold tax at the full US statutory rate of 30%. 

There is also a US$50 fee if you do not fill in the required form.

What does IG do with my information?

We will hold these forms on file and will not provide them to the IRS unless they are required as part of an IRS audit.

* IG has extended its current Qualified Intermediary (QI) status to include a Qualified Derivatives Dealer (QDD) status. This means that for in-scope contracts, we can receive dividend-equivalent payments without the deduction of tax and ensure the correct amount of withholding tax is deducted from dividend equivalent payments made to clients.