Capital gains for U.S. expats refer to the profits from the sale of investments, property, or assets that are subject to taxation by the U.S. government. As a U.S. citizen or resident, you are subject to U.S. tax laws on your worldwide income, including capital gains, regardless of where you live or where the asset is sold.
Here's an explanation of capital gains taxation for U.S. expats:
1. What Are Capital Gains?
Capital gains are the profits you make from selling an asset for more than you paid for it. The asset can include things like:
- Stocks, bonds, or mutual funds
- Real estate properties (primary residence, rental properties, etc.)
- Business interests or partnerships
- Precious metals, collectibles, and other assets
The amount of capital gain is calculated by subtracting your basis (the amount you paid for the asset) from the selling price. If you sell the asset for more than your basis, the difference is a capital gain; if you sell it for less, it’s a capital loss.
2. Types of Capital Gains:
There are two types of capital gains for tax purposes:
- Short-Term Capital Gains: Gains on assets held for 1 year or less. These are taxed at ordinary income tax rates, which can range from 10% to 37% depending on your overall income.
- Long-Term Capital Gains: Gains on assets held for more than 1 year. Long-term capital gains are taxed at reduced rates, generally 0%, 15%, or 20%, depending on your income level.
3. Capital Gains Tax for U.S. Expats
- U.S. Taxation on Worldwide Income: As a U.S. expat, you are still required to file a U.S. tax return and report capital gains from the sale of any assets, no matter where they are located. This means that you will need to report sales of assets held in other countries, such as real estate in your host country or foreign investments.
- Capital Gains Tax Rates:
- Short-Term Capital Gains: These are taxed at the ordinary income tax rate, which can range from 10% to 37% (based on your total taxable income).
- Long-Term Capital Gains: These are taxed at reduced rates, generally:
- 0% for taxpayers in the 10% or 12% tax brackets.
- 15% for taxpayers in the 22%, 24%, 32%, and 35% brackets.
- 20% for taxpayers in the 37% bracket.
- You will report your capital gains on Schedule D and Form 8949.
4. Foreign Earned Income Exclusion (FEIE) and Capital Gains
The Foreign Earned Income Exclusion (FEIE) allows you to exclude up to $120,000 (for 2023) of earned income from U.S. income tax, but capital gains are not eligible for exclusion under the FEIE. This means that even if you exclude foreign earned income, you must still report and pay U.S. taxes on capital gains from the sale of assets.
5. Foreign Tax Credit (FTC) and Capital Gains
- If you pay capital gains tax to a foreign country on the sale of assets, you may be eligible to claim a Foreign Tax Credit (FTC) on your U.S. tax return. This can help reduce the amount of double taxation you face, as the U.S. taxes you on your worldwide income, but the FTC allows you to offset some of the U.S. tax liability with taxes paid to another country.
- The FTC is generally limited to the amount of U.S. tax that would be due on the foreign-sourced income (i.e., your capital gain). However, it doesn’t eliminate U.S. taxes altogether.
- If the foreign tax rate is higher than the U.S. rate, you might still be liable for some U.S. tax.
6. Sale of U.S. Property (Real Estate) and Capital Gains
- If you sell a U.S. property (such as a second home or rental property) while living abroad, you will still be subject to U.S. capital gains tax. This applies whether the property is located in the U.S. or abroad, but the Foreign Tax Credit may help offset taxes if you're subject to local capital gains tax in the country where you live.
- Primary residence: If you sell your primary residence and meet certain conditions (e.g., living in the home for at least two out of the past five years), you may be eligible for an exclusion of up to $250,000 ($500,000 for married couples) of capital gains.
