The Costs Behind Zero Commission, and Dividend Withholding Tax

Zero commission isn't zero cost

Brokers that charge no commission still leave you with the hidden cost of the spread, plus a tiny regulatory fees when you sell. If you trade often, these add up.

How brokers make money

Many zero-commission brokers send orders to market makers to fill and receive payment for order flow, and they also earn from margin interest and interest on idle cash.

Tax withheld from dividends first

Dividends on US stocks paid to non-US residents are withheld at a default 30% withholding tax. After you submit a Form W-8BEN to your broker, it can drop to the treaty rate (for example usually 10% for mainland China and Japan residents, 15% for Korea residents).

Key takeaways

• Many brokers charge no commission, but the bid-ask spread, the SEC fee on sales and the FINRA Trading Activity Fee still apply; many zero-commission brokers make money from payment for order flow.
• If you trade often, “invisible costs” like the spread add up to a fair amount.
• US dividends to non-US residents are withheld at 30% by default; after you file a W-8BEN it drops to the tax-treaty rate, for example usually 10% for residents of mainland China and Japan and usually 15% for residents of Korea.
• Capital gains when non-US residents sell US stocks usually aren't taxed in the US, but you still need to handle them under the tax law where you live.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. With the “zero-commission broker”, buy and sell 20 shares of a $50 stock: what does the round trip cost? Which item is the biggest?
2. Switch to “per-trade commission”: what share of the trade goes to costs now? Set the quantity to 1,000 shares and compare again.
3. In the dividend simulator, with a $0.80 dividend per share and 100 shares: how much do you receive without a W-8BEN?
4. Switch to a mainland China resident and a Korean resident: how much does the amount received differ?

Quiz and explanations

1. What cost might you still have trading through a “zero-commission” broker?

Answer: The bid-ask spread and small regulatory fees on sales.Zero commission just means no commission; the spread and regulatory fees on sales still exist.

2. For a non-US resident who hasn't filed a W-8BEN, how much is generally withheld from US dividends?

Answer: 30%.Non-US residents are withheld at 30% by default; only after filing a W-8BEN can it be reduced under a tax treaty.

3. A resident of mainland China has filed a W-8BEN and receives a $100 US dividend. How much do they usually get?

Answer: $90.The US–China tax treaty dividend rate is generally 10%, so $10 is withheld and $90 is received.

Terms in this lesson

• commission (Commission): The fee you pay your broker each time you buy or sell, which comes straight out of your profit.
• minimum commission (Minimum Commission): The lowest commission a broker charges per trade. When a trade is very small and the percentage commission falls below it, you still pay the minimum, so fees take a bigger share.
• payment for order flow (Payment for Order Flow): What a market maker pays a broker for sending it customer orders to fill. It's a revenue source for many “zero-commission” brokers, and regulators watch whether customers still get the best price.
• regulatory fees (Regulatory Fees): Small fees collected for regulators when you sell US stocks, such as the SEC fee and the FINRA Trading Activity Fee. They're usually just a few cents, and the rates are adjusted regularly.
• spread (Spread): The gap between the Ask and the Bid, a hidden cost on every trade.
• Form W-8BEN: A US tax form non-US residents give their broker to declare their status. Once filed, dividend withholding can drop to the rate in the tax treaty between the US and your country or region.
• withholding tax (Withholding Tax): Tax deducted from a dividend before it reaches your account. Dividends on US stocks paid to non-US residents are withheld at 30% by default, which a tax treaty can reduce.