NOTE: we do our best to share general resources so you can do your own research. When it comes to tax, this is personal to your investing and financial position. We are not a tax adviser, and don't have any information about your personal situation. When investing, there may be tax implications and you should get advice from a licensed tax adviser.

Have you ever wanted to own a piece of a tech giant like Amazon, Apple or Tesla?

You've done your research, identified a few US companies you want to invest in, and are ready to take the plunge.

But before you hit that "buy" button, did you consider the tax implications of buying US shares in Australia?

The world of US shares can be a bit of a minefield when it comes to taxes, especially for first-time investors. If you don't get a good handle on the tax situation, you could be forking out way more on taxes than necessary. And this could mess with your money goals.

In this article, we'll explore everything you need to know about the Australian tax rules for buying, holding, and selling US shares. We’ll also cover considerations you need to think about if you’re deciding to buy US shares for your investment portfolio.

Why Invest in US Shares?

Investing apps have made the US sharemarket more accessible for Aussie investors. In fact, our community has added to their core portfolio some popular and cheap ETFs that buy a slice of the US economy .

Why is this the case? Well, it’s simple. The US sharemarket is the largest in the world. It is home to some of the most successful companies, which can pay higher dividends than their Australian counterparts. Young investors are looking to this as a way to make some extra money and grow their wealth over time.

Some of the most exciting new industries and trends are emerging in the US, such as AI and biotech. Investing in the US sharemarket gives you access to sectors and industries that you won't find in the Australian market.

But let's not forget that the US sharemarket recently experienced a correction after years of pre-pandemic growth. This reminds us that easy gains from speculations in the sharemarket don’t last forever. Sentiment in one sharemarket can change quickly due to many factors outside our awareness or control. That's why diversification in this asset class and a long term perspective are crucial.

Let's take a closer look at the pros and cons of investing in US shares compared to Australian shares.

Buying US shares vs Australian shares

As a first-time investor, you may be wondering: “ What is the difference between buying US shares and Australian shares ?”. After all, aren't they both stocks in publicly traded companies?

Well, yes and no. While they have some things in common, there are some key differences to remember.

Market size and liquidity. The US stock market is the largest in the world, with thousands of publicly traded companies to choose from. There is more money available to buy and sell shares, so it's easier to do it quickly without changing the market price much.

In comparison, the Australian stock market is smaller and more focused. On the positive side, Australian shares may provide more chances to invest in companies that you know and care about. This can make you feel closer to your investments and more likely to keep them for much longer.

Currency risk. Another important consideration is currency risk. When you buy shares in a US company, you're essentially investing in US dollars. This means that changes in the value of the Australian dollar compared to the US dollar can affect your profits.

This can be a double-edged sword. A stronger US dollar may help your investment returns, but a weaker US dollar could make them worse. If you invest in local stocks with Australian dollars, you don't need to stress about shifts in exchange rates.

Regulatory environment. The US has stricter rules and regulations, which makes it harder for companies to list on US stock exchanges. This can be a good thing as it may provide more protection for investors.

But, it may also mean that some innovative or fast-growing companies may not be open for investment. In contrast, the laws and regulations in Australia are usually seen as more supportive of businesses.

Taxation. US shares have different tax laws than Australian shares, and this can affect your investment gains. For Australian shares, a capital gains tax is applied. This tax is based on the money made when selling a share for a higher price than what was paid for it.

US shares also come with capital gains tax for Australian investors. We'll look at the extra details of the tax implications of buying US shares in Australia in the next section.

Time zone difference. The US stock market operates on a different schedule to the Australian market. For example, the New York Stock Exchange (NYSE) starts at 9:30 am in ET, which is 11:30 pm in AEST.

If Australian investors want to buy or sell shares when the US market opens, they need to be awake during their nighttime. Likewise, if they want to trade during US market hours, they might have to be awake in the morning. This means that Australian investors may not be able to respond to changes as fast as US investors.

To be clear, we're not advocating for frequent trading or trying to time the market. Investing in US shares should not be treated like a “get rich quick” scheme. In the world of investing, our view is that it pays to be lazy. Historically, a simple and patient approach gives better long term results than short term trading.

Tax considerations for buying US shares in Australia

As a first-time investor, it's easy to get caught up in the excitement of picking stocks. However, it's important to also understand your tax situation when buying US shares. Knowing the ins and outs of taxes can help you cut your liabilities to achieve your money goals sooner.

Here’s a quick rundown of the tax implications of buying US shares in Australia:

1. Capital Gains Tax and record keeping

When you sell your US shares, you'll need to pay Capital Gains Tax on any profits you make. Keep track of your buy price, the amount you sold it for, and any extra fees. This way, you can work out how much you made from it. Keeping detailed records will also make it easier to fill out your tax return at the end of the financial year.

If you have a Pearler account, our Sharesight integration can help you set up automated tax reporting.

2. Dividend tax

If the US company you invest in pays dividends, you'll also need to pay tax on that income. The great news is that Australia and the US have a tax treaty to keep you from having to pay tax twice on the same income. Still, you'll need to declare the dividends on your Australian tax return.

3. Foreign exchange gains/losses

When you buy and sell US stocks, you're dealing in US dollars. So if the US dollar goes up against the Australian dollar, you'll make a foreign exchange gain when you sell your shares. But if the US dollar goes down, you'll make a foreign exchange loss. It's important to remember this when working out your total investment return.

4. Tax residency

Your tax residency status will also affect how you're taxed on your US shares. If you're an Aussie and have to pay taxes, you'll need to declare any gains you make from US stocks on your tax return. If you're a non-resident, you may be subject to different tax rates and rules.

5. Tax-efficient investment structures

There are different ways to invest in US shares and reduce your taxes at the same time. One way is to invest through a self-managed super fund (SMSF) or a trust. These structures could help you pay less taxes, but they also have extra expenses and can be harder to set up.

It's smart to chat with a tax professional or financial advisor first before putting your money in the US sharemarket. They can help you get the lowdown on the tax numbers and stay tax-savvy. Don't be afraid to ask questions – it could save you a lot of money in the long run.

How to buy US shares in Australia

In the end, it all comes down to an investor's personal situation and preferences. These can include their investment goals, risk tolerance, and investment horizon.

For example, someone with a higher tolerance for risk and a longer investment horizon might go for the US sharemarket. On the other hand, more conservative folks may prefer the calmer waters of the Australian market.

Once you've decided to invest in US shares, the next step is to choose a platform to buy them on. The best investing apps out there have low fees, no maintenance fees, or no other surprising fees.

If you're looking to invest in ASX and US shares, Pearler makes it super easy to open an account, fund it, and start investing. Pearler also has a community of like-minded investors that make investing fun and engaging.

The goal of this article is to give insights into how purchasing US shares in Australia can impact your taxes. No matter how you choose to buy US shares in Australia, it's important to remember that investing always comes with risks. Do your own research, consider your personal circumstances, and seek professional advice.

Happy investing!