What risks come with investing in international markets?
Although the rewards of investing in international stocks can be high, there are some risks to consider.
- International markets often see outsize impacts when economic conditions worsen.
- Political instability and other developments in a country can devalue an investment, and currency values can fluctuate.
- Geopolitical dynamics can result in the withdrawal of support from institutional investors, leading to poor stock performance.
- Investors can face higher levels of risk related to visibility on business operations and the reliability of reported financial results.
Taxes on international stock investments
International stocks may be subject to additional tax requirements beyond the standard tax liabilities of U.S.-based companies. In some cases, shareholders may owe taxes to both the U.S. and the country in which the company is domiciled.
Taxes on international stocks vary according to the rules of the underlying company's home country. This means there is no one-size-fits-all breakdown for how taxes on foreign companies are handled, and investors should familiarize themselves with the relevant tax structures before establishing significant positions in foreign equities.
U.S.-based investors will always owe taxes to the U.S. government on gains from international stocks, but they may also owe foreign taxes. The good news is that U.S. investors can either claim a tax credit or a deduction for foreign taxes paid on international stocks. This avoids double taxation.
If a U.S. citizen owns shares of a foreign stock that pays a dividend, the payout will typically be taxed based on the rules of the country in which the company is located. On the other hand, investors usually don't have to do anything to fulfill this tax liability. Part of the dividend payment will automatically be withheld and transferred to the government of the country where the business is headquartered.
When U.S. investors look at the 1099-B form connected to the dividend paid by the international stock, they will see that they have received a tax credit. This effectively prevents the shareholder from having to pay taxes on the dividend to both the U.S. and the country where the company is located.
Key differences between international and U.S. stocks
International companies with stocks that primarily trade on foreign exchanges may have different financial auditing, reporting, and visibility requirements than U.S. stocks, which are subject to requirements set by the Securities and Exchange Commission (SEC). Because of these differences, international stocks can carry risks that investors need to consider.
