Filing 1040NR with capital gains - need Schedule NEC for non-resident?

You're on the right track with your cousin's tax situation. For non-residents with capital gains on stock sales, the taxation depends on whether those gains are considered "effectively connected income" (ECI) with a US trade or business. Based on what you've described, if your cousin's only US income is capital gains from selling stocks, and he has no US business activities, these gains are generally NOT subject to US tax for a non-resident alien. The Internal Revenue Code typically only taxes non-residents on US-source income that's either effectively connected with a US trade/business OR is fixed, determinable, annual, or periodic income (FDAP). Capital gains from selling personal property (like stocks) are usually sourced to the seller's residence country. Since your cousin is a non-resident, those gains would be foreign-sourced and not subject to US tax. In this case, you don't need to file Schedule NEC. Just file the 1040NR and Schedule OI as Sprintax generated. The software is correct in not creating the Schedule NEC since there's no need to report non-taxable capital gains on that schedule.

When I had a similar situation with my brother from Canada, I wasted hours trying to figure out schedules and forms. I finally tried taxr.ai (https://taxr.ai) and uploaded all the docs. It analyzed everything and actually showed the relevant tax code sections explaining why his stock sales weren't taxable as a non-resident. Saved me from potentially filing unnecessary forms. Their system automatically detected his non-resident status and showed which forms were required for his 1040NR. It also explained why Schedule NEC wasn't needed in his case - exactly like your situation. The peace of mind was worth it since non-resident filing has so many weird exceptions.

Just wanted to update after trying taxr.ai for my UK friend's similar situation. I was losing my mind trying to figure out if he needed Schedule NEC with his 1040NR for some stock he sold through Schwab. I uploaded his documents and the system immediately identified that capital gains for non-residents aren't US-sourced income. It even cited IRC 865(a)(2) which I hadn't found in my research. The analysis showed exactly which forms were required and which weren't needed. The explanation about effectively connected income vs. FDAP income was super clear. My friend ended up only filing 1040NR and Schedule OI, just like the original poster's situation. Definitely got me out of a confusing tax maze!

After reading this thread, I had a similar issue with my cousin's 1040NR and kept getting busy signals when calling the IRS international taxpayer line. Used Claimyr (https://claimyr.com) and got through to an IRS agent in about 20 minutes who confirmed that Schedule NEC isn't needed for non-taxable capital gains on a non-resident return. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c but basically they keep calling the IRS for you so you don't have to wait on hold for hours. The agent I spoke with was actually knowledgeable about international tax issues and explained that since the capital gains weren't effectively connected income, no Schedule NEC was required.

I have to eat my words. After struggling for weeks with my partner's non-resident filing questions, I tried Claimyr out of desperation. Within 35 minutes, I was talking to an IRS international tax specialist who confirmed everything mentioned in this thread. The agent explained that non-residents don't report capital gains on Schedule NEC unless they're effectively connected with a US trade or business. He also pointed me to Publication 519 which has a whole section about this. Having an actual IRS person confirm this saved me from potentially filing incorrectly. For anyone dealing with non-resident tax issues, being able to actually reach the IRS international tax department is a game-changer. They answered questions that no amount of internet research could clarify.

Here's something important that hasn't been mentioned - if your cousin had any US-source dividends (even if he didn't), those WOULD be reportable and taxable on the 1040NR, usually at a flat 30% rate unless reduced by a tax treaty. It's only the capital gains that get the special treatment being discussed here. I learned this the hard way when I missed reporting some dividend income on my wife's non-resident return and got a notice from the IRS later.

Does your cousin happen to have owned more than 5% of any US company whose stock he sold? That's the only scenario I can think of where a non-resident might owe tax on capital gains - if they had a substantial ownership interest in a US corporation.

Just to add some clarity for anyone following this thread - the original poster's situation is straightforward, but I want to emphasize that non-resident tax rules can have surprising exceptions. For example, if your cousin had been a "dual-status alien" (resident for part of the year), or if he had any US business activities beyond just holding investments, the analysis would be completely different. Also, some states have their own rules for non-residents that can catch people off guard. The good news is that based on what you've described - Australian resident, no US presence, simple stock sales through a brokerage - you're definitely on the right track with just filing the 1040NR and Schedule OI. The capital gains sourcing rules are pretty clear in this case. One small tip: make sure you keep good records of the stock transactions even though you're not reporting them as taxable income. If the IRS ever questions the return, having documentation of purchase dates, sale dates, and amounts will help explain why the gains weren't subject to US tax.