If you are a US Expat living and working in a foreign country, you are required to file a US expat tax return with the United States every year. You are also required to report any capital asset sales to the IRS.
When you are an American Citizen or Green Card Holder living and working in another country, you are still required to file and pay taxes to the Internal Revenue Service. This is true no matter where in the world you live, and your filing obligations include accurate reporting of capital asset sales. A capital asset is defined by the IRS as a property which you own either personally or as an investment. This article is intended to increase your awareness of the IRS rules regarding capital gains and losses.
The term ‘capital assets’ is not limited to investment property or stocks and bonds; your home and your car are also considered capital assets. If you own a capital asset for less than one year, it is considered a short-term asset; for capital assets held for longer than a year, you are considered to own long-term assets.
Some US Expats are under the impression that only investment properties and other investments like stocks and bonds are considered capital assets, and this isn’t true. Your home and your vehicle are also considered capital assets.
If you hold on to your capital assets for longer than one year before they are sold, you are considered to have held long-term assets. If you sell your capital assets within one year of purchasing them, you are considered to have held short-term assets.
To determine your capital gains or losses, simply figure the difference between the price at which you purchased your capital asset and the price at which it was sold. Some losses on investment property are deductible, but there are no available deductions for selling personal property.
Calculating your capital gains or losses on your US expat tax return is actually quite simple. You simply figure the difference between the amount you paid and the amount you received from selling your asset(s). There are some expenses associated with the acquisition and sale of investment property which are deductible. The main difference between investment and personal asset sale - capital loss from investment property is deductible. Capital loss from sale or personal assets (home, car) are not. Collectibles (antique cars, art) are considered investment property.
If you sell personal property, and net result from the sale is a negative amount, you are not required to report it to the IRS and you will not be able to deduct the loss. However, the gains from selling investment or personal assets are taxable and you must report a net capital gain on your US expat tax return.
To report your capital gains and losses, use both Schedule D (Capital Gains and Losses) and Form 8948 (Sales and Other Dispositions of Capital Assets). When your capital loss exceeds the limit you are able to deduct, you can carry your loss over to the following tax year.
When reporting capital gains and losses to the IRS, you are required to use two forms: Form 8948 and Schedule D. If your losses are greater than your gains, you may report your losses and claim a legitimate deduction. If your losses total more than $3K (the max allowance for capital losses), you may deduct the maximum amount and claim your losses as a deduction against your taxes next year. Remember that the maximum deduction of capital losses is only $1,500 per year if you are filing your tax return as MFS (Married Filing Separately).
If you have a high income from capital gains, you may be liable for additional taxation through the Net Investment Income Tax of 3.8%.
It’s important to include all capital gains on your US expat tax return. The Net Investment Income Tax was added in 2013. If your income is higher than the established threshold outlined below, you will be required to pay an additional 3.8% when the Net Investment Income Tax is applied. The Net Investment Income Tax will be assessed if you have net investment income and any of the following apply:
You are married and filing a joint return or you are a Qualifying Widow(er) with a Dependent Child and you have a Modified Adjusted Gross Income (MAGI) of $250K,
You are filing as Single or Head of Household (HoH) and you have a MAGI of $200K, or
You are married and filing separate returns and you have a MAGI of $125K.
Modified adjusted gross income (MAGI) in a nutshell is your AGI (Adjusted Gross income) from line 37 of form 1040 with added back income reducing items, such as foreign earned income exclusion
I.J. Zemelman, EA is the founder of Taxes for Expats