As a United States Citizen or Green Card Holder working overseas you may or may not be aware of your requirement to file a US expat tax return annually. If you are just learning of your requirement to file, you may also be interested in learning that all of your worldwide income must be reported. Worldwide income does not simply refer to wages earned from an employer or self-employment; it also refers to any income generated by foreign accounts, investments, estates or any other type of income from any domestic or foreign source.
In this article we will not only be taking a look at some of the tax provisions offered to US expats when it comes to capital gains, but we will also be taking a look at how to figure capital gains income and losses and how to report them accurately on your US expat tax return.
What is Capital Gains Income?
According to the United States Internal Revenue Service (IRS), capital gains income refers to any income derived from capital purchases (real estate, fine art, etc) or investments (stock market, Forex, bonds, etc). An actual gain is calculated by subtracting the purchase price from the sale price and deducting associated qualified expenses. You are required to report both capital gains and losses on your US expat tax return.
Capital gains income is divided into 2 categories: short-term and long-term. The term “short-term capital gains” refers to income derived from assets which were held by the taxpayer for a period of less than 1 year. When you hold on to assets for longer than 1 year before reselling for profit, you are considered to be carrying long-term capital gains and should be reported as such on your US expat tax return.
Note: For the purpose of this article, ‘assets’ refers to property, investment accounts, bonds, stocks, and any other item of significant value which can be used to generate capital gains income.
How are Taxes Applied to Capital Gains on a US Expat Tax Return?
While different factors may determine the actual amount of taxes due on capital gains income, the average amount of liability is 15% of net capital gains. Some short-term capital gains may be subject to the same rate of taxation as your wages, which – depending on your tax bracket – could be significantly higher than 15%. There are situations in which income levels would completely annihilate any tax liability on capital gains, and there are certain types of capital gains which are subject to much higher tax rates than the average amount.
If you wind up with a capital loss, you will be able to deduct up to $3K of the loss from other income on your US tax return. If your loss totals more than $3K, you will be able to carry the loss over and apply it to future years as a deduction. Losses are limited to investment assets – not assets which are acquired for personal use without the intention of reselling. For example, your primary vehicle was purchased for personal use; so when you sell it 12 years or so after buying it to help fund your next automobile down-payment, you cannot claim the amount you paid on your car as a loss.
What Form Should I Use to Report Capital Gains on My US Expat Taxes?
Capital gains are reported on Form 8949. If this is the first time you are reporting capital gains, this isn’t new to you. If you have reported capital gains in the past you may recall having to file Schedule D. You still will be required to file Schedule D, but Form 8949 is the new, simplified form on which to calculate all capital gains and losses. Take a look at some other new tax forms.
Once you have calculated all of your gains and losses on Form 8949, you will then transfer the amounts to Schedule D and ultimately to Form 1040. If you have completed both of these forms accurately, you have met the requirements for reporting capital gains income.
Exceptions and Provisions to Capital Gains Filing Requirements
There is a very popular exclusion associated with capital gains when it comes to real estate. This exclusion is that of personal use on an investment property. The exclusion rule states that if you purchase a piece of investment property and use it as your primary residence for a period of at least 2 years within the 5 year period prior to its sale, you may exclude the capital gains - the max allowable amount for this exclusion is $250K for single taxpayers and $500K for married couples filing jointly. Unlike most allowable exclusions which must be documented before they’re deducted, the IRS doesn’t even require you to report the income for this exclusion at all.
The aforementioned exclusion IS NOT available for real estate purchased with a 1031 Exchange. Additionally, this exclusion may not be used more than once in a 5 year period. For the purposes of this exclusion, the location of the real estate is not important; it could be in California or Chile – it’s still deductible.
Summary on Capital Gains
If you invest in an overseas corporation and realize a 25% ROI (Return on Investment), this qualifies as a capital gain. If you purchased a series of wines and sold them for a profit, this is also a capital gain. These and all other capital gains must be reported on your US expat tax return to remain compliant with US tax laws and regulations.
You can make your job of reporting capital gains and losses by keeping thorough records throughout the year. Make sure to take the time to ensure accuracy, as mistakes on US expat tax returns can cause delays in processing and may result in fines and/or interest. If you’re unsure as to how to calculate your capital gains and losses or you simply want somebody else to take over the burden of filing your US expat tax return, make sure to get in touch with one of our tax professionals at Taxes for Expats.
I.J. Zemelman, EA is the founder of Taxes for Expats