Understanding Backup Withholding on W-9 for Foreign Investors
Hey everyone, Need some guidance on Backup Withholding rules. I signed up with a US brokerage last month to buy some stocks, but ran into an issue. I submitted my paperwork but forgot to include my FTIN (Foreign Tax ID Number), so my account got slapped with a withholding restriction. The broker emailed me saying "The withholding restriction will withhold 24% of dividend and interest income, as well as gross sales proceeds." I've already submitted a corrected form with my FTIN but have to wait about a week for processing. I didn't want to wait to start trading, so I went ahead and made my first purchase. When I sold the stocks, I was shocked to see they withheld 24% of the ENTIRE transaction amount - not just my profits but the whole sum including my initial investment! This seems crazy - if this happens every time, you'd basically just be losing money with each trade. I'm planning to call the broker tomorrow to verify if this is correct or a mistake. My main question is: does anyone know if this 24% Backup Withholding applies to every single transaction while the restriction is in place, or is there some time limit? How exactly does this withholding mechanism work for foreign investors? Any insights would be greatly appreciated! Thanks in advance.
18 comments
Join the conversation
Logan Chiang
The 24% backup withholding is definitely being applied incorrectly in your situation. Backup withholding should only apply to the gains/proceeds, not your entire investment amount. This is a misapplication of the rules. Here's what's happening: When you don't provide a correct Tax ID (or in your case, FTIN), the broker is required by the IRS to withhold 24% on certain types of payments. However, this should only apply to: - Interest income - Dividends - Other "reportable payments" like your gains The broker should never be withholding from your principal investment amount. That's your money that you're using to make the investment, not income or proceeds. I'd definitely call the broker ASAP and have them correct this. They should refund the excess withholding immediately since it was applied incorrectly.
0 coins
Isla Fischer
•Thanks for explaining! Quick question - once the new W-9 with the FTIN is processed, will they automatically stop the backup withholding on future trades, or is there something else that needs to be done? Also, for the money they already incorrectly withheld, will that be refunded automatically or do I need to request it specifically?
0 coins
Logan Chiang
•Once your broker processes the corrected W-9 with your valid FTIN, they should automatically stop the backup withholding on all future transactions. This typically takes 5-7 business days as you mentioned, but I would follow up if it takes longer than that. Regarding the incorrectly withheld funds, you'll likely need to specifically request a refund. These things rarely happen automatically. When you call, make sure to clearly explain that they withheld from your principal investment amount rather than just from the gains, and request an immediate refund of the excess withholding. Have your transaction details ready when you call so you can clearly show them what happened.
0 coins
Miles Hammonds
I had a similar issue when I first started trading in the US market. Check out https://taxr.ai - it helped me understand exactly how backup withholding was supposed to work for my situation. I was confused about the W-9 requirements as a non-US person (should have been using W-8BEN instead), and they clarified everything. Their system analyzed my specific situation and explained what forms I needed, how withholding should be applied, and what I could do to fix my issue. They even showed me how to make sure I wasn't being overcharged with withholding by my broker.
0 coins
Ruby Blake
•How exactly does taxr.ai work? Do you just upload your forms and they tell you what's wrong? I'm dealing with W-8BEN issues myself and wondering if this could help before I submit something incorrectly.
0 coins
Micah Franklin
•Seems interesting but I'm skeptical. Can it really handle international tax situations? I tried using TurboTax for some foreign investment questions last year and it was completely useless for anything beyond basic US scenarios.
0 coins
Miles Hammonds
•You simply upload any tax documents you have, and their AI immediately analyzes them for errors or potential issues. It highlights problems with your forms before you submit them to avoid exactly the situation the original poster is having. For international situations, it's actually much better than regular tax software. It handles the complexities of foreign tax IDs, treaties, and withholding requirements that most basic tax programs don't cover. It's specifically designed to understand these cross-border tax situations and explain them in plain language.
0 coins
Ruby Blake
Just wanted to update everyone that I tried taxr.ai after asking about it here. Wow, what a lifesaver! I uploaded my partially completed W-8BEN form and it immediately identified three mistakes I had made that would have triggered backup withholding. It explained exactly which boxes I needed to fill out based on my country of residence (which has a tax treaty with the US), and showed me how to properly document my foreign tax ID to avoid the exact withholding issue the original poster experienced. Saved me from potentially losing thousands in incorrectly withheld funds!
0 coins
Ella Harper
If you need to resolve this quickly, I had a similar backup withholding problem and spent DAYS trying to reach someone at my broker. Eventually used https://claimyr.com to get through to my broker's tax department in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The backup withholding problem was fixed the same day rather than waiting for them to "review" my case for weeks. Was absolutely worth it to get immediate resolution and have my funds released.
0 coins
PrinceJoe
•Wait, how does this actually work? You pay this service to call the broker for you? Couldn't you just keep calling yourself until you get through?
0 coins
Brooklyn Knight
•This sounds like a scam. Why would I pay someone else to make a phone call that I could make myself? Most brokers have online chat support now anyway.
0 coins
Ella Harper
•They don't call for you - they secure your place in the phone queue and call you when your turn is coming up. Instead of waiting on hold for hours, you just get a call when a representative is about to pick up. Then you talk directly to the broker yourself. It worked for me because my broker's tax department specifically had a 2+ hour hold time, and I kept getting disconnected. With three failed attempts trying to do it myself, each wasting half my day, using this service saved me a ton of time and frustration. For chat support, most brokers don't allow complex tax issues to be handled through chat - they require phone calls to the specialized tax team.
0 coins
Brooklyn Knight
I feel dumb for doubting this service now. After posting my skeptical comment, I decided to try Claimyr since I was dealing with a similar backup withholding issue with Fidelity. Their tax department had a 3.5 hour hold time when I called! Instead, I used the service, went about my day, and got a call when a representative was about to answer. Explained my W-9 issue to the tax specialist, and they fixed the incorrect withholding immediately. They even put a note on my account to refund the incorrectly withheld amounts from my previous trades once my updated form is processed. Saved me literally hours of waiting on hold and got my issue resolved in one call.
0 coins
Owen Devar
Just to add some clarity on the backup withholding rules since there seems to be confusion: Backup withholding at 24% is required when: 1. You fail to provide your TIN (or FTIN for foreign persons) 2. The IRS notifies the broker that you provided an incorrect TIN 3. You have underreporting violations 4. You fail to certify you're not subject to backup withholding For foreigners, you should actually be filing a W-8BEN, not a W-9. W-9 is for US persons. With a properly completed W-8BEN, you'd typically be subject to a lower withholding rate (often 15% or lower depending on tax treaties) and only on dividends - not on gross proceeds from sales.
0 coins
Abigail Spencer
•Thanks for this clarification! I think you're right - I might have filled out the wrong form entirely. I'm not a US citizen or resident, so it sounds like I should have submitted a W-8BEN instead of a W-9. Could this be why they're applying the withholding incorrectly?
0 coins
Owen Devar
•Absolutely! This is exactly why you're experiencing the incorrect withholding. By submitting a W-9, you inadvertently represented yourself as a US person, which created a mismatch with your foreign tax ID. When the broker detected this inconsistency, they defaulted to backup withholding. You need to immediately contact them and clarify that you should be filing a W-8BEN as a non-US person. This will not only stop the inappropriate backup withholding but should also change how they treat your account for tax purposes going forward. Once you submit the correct W-8BEN form with your FTIN, they should be able to process a refund of the incorrectly withheld amounts from your gross proceeds, as that withholding should never have been applied in the first place.
0 coins
Daniel Rivera
This exact thing happened to me with E*TRADE last year! It was an absolute nightmare. They applied backup withholding to my entire trade amount for THREE MONTHS before it got sorted out. What fixed it: Called and specifically asked to speak to their "Tax Operations" department (not regular customer service). Had to explicitly tell them they were applying backup withholding to principal amounts incorrectly. Regular reps kept insisting it was correct until I got to someone who actually understood tax regulations. Good luck!
0 coins
Sophie Footman
•Did they refund all the incorrectly withheld amounts after getting it fixed? How long did that process take? I'm in a similar situation with TD Ameritrade right now.
0 coins