Understanding Capital Gains Taxes: What Expats Need to Know

Thinking about selling assets while living abroad? For US expats, capital gains taxes involve unique challenges, from maneuvering cross-border rules to avoiding double taxation. The good news is that with the right guidance, you can protect your earnings, minimize your tax liability, and remain fully compliant with US filing requirements.

Capital gains can be tricky for US expats, but this is where MyExpatTaxes shines. Our team has guided clients through everything from selling foreign property to handling complex investment portfolios. In this article, we’ll walk you through the essentials: how capital gains taxes work, the difference between short- and long-term gains, what forms to file, and smart strategies to reduce your tax bill.

What are Capital Gains?

Living abroad doesn’t exempt Americans from US tax rules. US citizens and Green Card holders must continue filing a US tax return if their income exceeds certain thresholds, no matter where in the world they live. That includes reporting and often paying taxes on capital gains.

So, what are capital gains? In simple terms, they’re the profit you make when you sell an asset for more than you originally paid for it. Assets can include anything from property and stocks to bonds, jewelry, business interests, or even cryptocurrency. When you sell at a profit, that gain is generally taxable under US law.

Conversely, if you sell at a loss, it may reduce your overall taxable income; this is known as capital losses.

Importantly, the tax rate you’ll face depends on how long you held the asset before selling, which brings us to the difference between short-term and long-term capital gains.

Short- vs Long-Term Capital Gains

Short-term capital gains (from assets held 12 months or less) are taxed the same as your ordinary income. That means the rate depends on your tax bracket, anywhere between 10% and 37%.

Short-Term Capital Gains Tax Rates for Tax Year 2024

Long-term capital gains apply when you sell an asset you’ve owned for more than one year. These gains are taxed at preferential rates of 0%, 15%, or 20%, depending on your total taxable income.

Long-Term Capital Gains Tax Rates for Tax Year 2024

Sources of Capital Gains

For US expats, capital gains can come from selling a wide range of assets. The most common include:

• Real estate — Selling property (whether a primary residence, rental, or investment property) can generate capital gains.
• Investments — This covers stocks, mutual funds, ETFs, and bonds.
• Cryptocurrency — Popular digital assets such as Bitcoin, Ethereum, or other coins are taxed when sold at a profit.
• Business ownership or interests — Selling a business or shares in a business can trigger capital gains.
• Personal property — Even items like cars, boats, or jewelry may create taxable capital gains if sold above their purchase price.

Business Capital Gains

An additional layer of complexity arises when you sell business assets. Many taxpayers are surprised to learn that a home, if ever rented out, is considered a business asset because it is used to generate income.

Business capital gains, such as those from the sale of depreciable business assets or real estate used in a trade or business, are generally reported on Form 4797 (Sales of Business Property) instead of Form 8949

• Section 1231 Property: Depreciable business property and real estate held for more than a year. Net gains may qualify for long-term capital gains rates, while net losses can be deducted as ordinary losses.
• Section 1245 Property: Depreciable personal property (such as equipment or other business assets). Any gain up to the amount of depreciation taken is taxed as ordinary income.
• Section 1250 Property: Depreciable real estate (such as rental buildings). Excess depreciation may be “recaptured” as ordinary income, while remaining gains may be subject to capital gains tax, with unrecaptured Section 1250 gains taxed up to 25%.

This distinction is essential, as the way the property is classified can significantly impact your final tax liability.

How Capital Gains Are Reported on Your US Expat Tax Return

Most expats report capital gains on their Form 1040. To stay compliant, here’s what you’ll need to do:

• Use Schedule D and Form 8949 or Form 4797 to report and calculate profits or losses from each sale.
• Calculate gains or losses using the formula: Selling price – (purchase price + improvement costs + selling fees).
• Convert all amounts into USD using the IRS-approved exchange rates for the relevant dates.
• Identify holding period, determine whether each gain is short-term or long-term, as this affects the tax rate.
• Check local rules, you may also need to report capital gains in your country of residence, even if already reported to the IRS.

Additional Forms You May Need to File

In some cases, additional IRS forms may apply. For example:

• Form 6252 — for installment sales where payments are spread over multiple years.
• Form 8824 — for like-kind exchanges (swapping one property for another).
• Form 2439 — for undistributed capital gains from certain mutual funds or REITs.

These are less common but can significantly affect your tax outcome. A tax professional can help determine if they apply to you.

Additional Reporting Requirements (FBAR & FATCA)

While not directly tied to capital gains, many expats must also file reports on their foreign accounts and assets if they cross certain thresholds:

• FBAR (FinCEN Form 114): Required if the combined value of your foreign bank accounts exceeds $10,000 at any point during the year.
• FATCA (Form 8938): Required if your foreign financial assets are worth more than $200,000 at year-end (or $300,000 at any time during the year). These thresholds vary depending on whether you live in the US or abroad and your filing status.

These filings are in addition to your tax return. Missing them can result in severe penalties, even if you don’t owe US tax on your capital gains.

Strategies for Minimizing Capital Gain Taxes as an Expat

Time the Sale

An effective strategy to minimize capital gains taxes is to hold investments or assets for the long term. The US taxes capital gains at a lower rate (longer than one year) than short-term gains. By timing the sale of your asset, you can reduce your overall tax liability.

Tax Treaties

The US has agreements with many countries to reduce double taxation. Saving clauses often limit the benefits for US citizens, but if you’re a teacher, student, or researcher, look for exceptions that may apply to you.

Use the Foreign Tax Credit (FTC)

The FTC allows you to claim a dollar-for-dollar credit for capital gains taxes you’ve already paid abroad. In practice, this usually means you only end up paying the higher of the two countries’ tax rates, avoiding being taxed twice on the same income. If your foreign tax bill is higher than your US liability, you can carry the extra credits back (1 year) or forward (up to 10 years) to offset future US tax bills.

Utilizing Tax-Advantaged Accounts

Certain retirement or investment accounts can offer tax benefits depending on your country of residence. If you are in a country with tax-deferred or tax-exempt accounts similar to US IRAs or 401(k)s, it may be possible to use these to your advantage to either defer or exclude taxes on capital gains. It will always depend on local laws and the specifics of the account. Remember that local tax benefits and deferral rules may not be applicable on the US side.

Estate Planning & Gifting

In the US, people who receive a gift or inheritance don’t owe federal tax on what they’re given. When those assets are eventually sold, capital gains are only calculated on the increase in value from the time they were inherited or received, thanks to the “step-up” in cost basis. This can significantly reduce or even eliminate capital gains tax.

Example: Your aunt bought stock for $10k, it’s worth $90k when you inherit it. Your basis is $90k. If you sell for $95k, you’re only taxed on $5k of gain, the step-up drastically reduces your capital gains exposure. If you sell the asset immediately (or close to) after inheriting, the sale price will likely equal the stepped-up basis. In that case, there’s no capital gain at all, so your tax liability is eliminated.

Tax-Loss Harvesting

One way to reduce your taxable gains is by strategically selling investments that are currently at a loss. By realizing these losses in the same year as your gains, you can offset the profits and lower your taxable capital gains. If your losses exceed your gains, you may deduct up to $3,000 ($1,500 if married filing separately) against other income, and any remaining loss can be carried forward using the Capital Loss Carryover Worksheet to offset future gains until it’s fully used.

Example: You have $12,000 in capital losses and $4,000 in capital gains. First, the $4,000 of gains are fully offset by $4,000 of your losses → leaving an $8,000 net loss. Next, you can deduct up to $3,000 of that net loss against ordinary income. The remaining $5,000 is carried forward to future years against any capital gains.

Tax Planning

By consulting the tax professionals at MyExpatTaxes through MyExpatPlanning, US expats can effectively plan to minimize their capital gains taxes. Whether it’s taking advantage of available IRS provisions like the FTC or strategically timing asset sales, our experts can guide you before you make a sale and support you every step of the way.

Common Mistakes to Avoid

• Investing in PFICs (Passive Foreign Investment Companies): Many expats don’t realize that non-US mutual funds, ETFs, and other pooled investments are often classified as PFICs under US tax law. These come with punitive tax treatment and complicated reporting requirements (Form 8621). Over time, PFIC rules can erode or even wipe out your capital gains, meaning the profits you thought you had may be largely lost to US tax.
• Overlooking the Currency Exchange Impact: All foreign-sourced income and capital gains must be reported in US dollars on your US tax return. Exchange rates can significantly affect your reported gains, and using the wrong conversion can distort your tax liability. Many expats make the mistake of overlooking this step, leading to inaccurate reporting and potential double taxation. To avoid errors, always use an official source such as the IRS Foreign Currency Exchange Rates.
• Misusing tax treaties: Tax treaties are notoriously confusing, causing expats to overlook the details between the US and their country of residence. While most tax treaties have a section on how capital gains should be reported and which country has tax rights, these benefits are typically not exempt from the savings clause, meaning US citizens cannot use them.

Confidently Navigate Capital Gains with Expert Support

Selling property, investments, or other valuable assets can quickly become complicated when you factor in US expat tax rules. From determining the right reporting forms to coordinating with foreign tax systems, even a small oversight can increase your tax bill.

At MyExpatTaxes, we simplify the tax side of capital gains for expats, from reporting correctly to making use of every credit and exclusion available. And with MyExpatPlanning, we go a step further by helping you make smarter decisions before you sell. The result: less stress, lower taxes, and full peace of mind knowing you’re compliant with US rules.

FAQs: Capital Gains for US Expats