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Tax Tips for U.S. Americans Abroad

Capital Gains Tax for US Citizens Living Abroad

You may be in the know about US Americans abroad needing to report their worldwide income every year to the IRS. Perhaps you even know about our one-of-a-kind expat tax software where you can report your US taxes smoothly, and in under 30 minutes. But what about handling capital assets for financial gain? Plus, what are capital gains tax for US citizens living abroad anyways?

Stay calm, and carry on! We’ll answer all your questions below.

Capital Gains Tax Explained

To put it simply, according to the Oxford dictionary, a capital gain is a profit from the sale of property or an investment. It is essentially, what you gain when you subtract the asset’s purchase price from the sale price. Capital gains can be recognized when the asset is sold and can be short term (one year or less) or long term (more than one year). 

For example, let’s say you sell a house higher than the original sale price. To determine the capital gain, you can use this calculation: 

House Sale Price + Any Additional Costs* – House Purchase Price = Capital Gain

*ie: renovation, repairs

If for example, you sell the house for less than the original purchase price, it is called a Capital Loss.

Any asset that gets sold and produces a capital gain is taxable by the IRS. This includes any activity inside and outside the US where capital gains are made.  So if you are selling your yacht in Italy more than the original purchase price as a US expat, you’ll have a capital gain. 

Most importantly, capital gains must be claimed when you do your US income taxes! The US taxes any and all capital gains at 0% to 20% – depending on your filing status.

Plus, if you have an interest in a Passive Foreign Investment Company, you might be subject to a higher tax rate on those gains. And, as we said in the above paragraph, this goes for capital gains on worldwide investments and assets too. This includes whether what you sold is subject to other (foreign) capital gains tax too.

Short-Term and Long-Term Gains

Did you know there are short-term and long-term capital gains?

Short-term gains are when you hold an asset (like a company stock) for a year or less before it’s sold. They will be taxed according to where your tax threshold is.

Long-term gains are the opposite – you’ve been owning your asset for more than one year old. Most likely your long-term tax rates will be between 0-20% depending on what your taxable income is. Generally, these tax rates will be lower than what short-term capital gains will be taxed on.

Foreign Property

However, if you own foreign property as an American, you may or may not have to pay a capital gains tax.

Meaning, any capital gain on qualified home sales* over $250,000 is taxable for the US. Anything under is exempt from capital gains tax. If you sell a property you own and lived in within the past five years in the Bahamas for $270,000 (when the original price was $250,000), you’ll get a $20,000 capital gain and will not need to pay tax to the US. However, you may need to pay tax for the Bahamas (it depends on their laws).

*Qualifying home sales can be in and outside the US, however, they must fulfill the two following requirements:

In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You’re eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale.

Generally, you’re not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.

IRS – Qualifying for the Exclusion

If you file jointly with your spouse on qualifying home sale capital gains, the threshold exemption goes up to $500,000.

Reporting Capital Gains

If you want to skip out on our efficient online tax software, then do this: Report your capital gains on Form 8949, Schedule D and transfer everything to Form 1040 is your best bet.

Form 1040 is the annual US tax return that all Americans abroad need to fill out or give to a professional to do it for them.

But what about reporting your capital losses? They will first be used to offset or balance out your capital gains. But it would have to be offset as short-term losses against short-term gains, and long-term losses against long-term gains. Then, once you have your net loss, you can deduct it against the other type of gain.

For example:

If you have $5,000 of a short-term loss, and a $1,000 short-term gain, the short-term loss (of $5,000) can be deducted against the net long-term gain (if you have one). But if a net capital loss of the year is more prominent, you can actually deduct up to $3,000 of the loss against other forms of income (like salary). For those who are “married filing separately” can deduct their capital losses up to $1,500.

Paying Capital Gains Tax to Another Country

Americans abroad who also have to pay capital gains tax in a foreign country can use the IRS Foreign Tax Credit benefit when filing their US tax return. Therefore, you can claim $1 US tax credit for every dollar of tax you’ve paid in another country. This prevents American expats from paying twice on taxes for their capital gains.

Need Some Support?

Still struggling to understand capital gains, losses and everything in between? We at MyExpatTaxes can help. Our well-informed, personal staff can assist you with any expat tax questions you have.

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16 Comments

  1. Avatar Jennifer Wolcott on March 5, 2020 at 8:34 pm

    Useful post, Michelle. One area you did not cover is that of rental property overseas, that is, property capital gain (or loss) that has been used primarily for rental, i.e., does not meet the criterion for use test. Is there still an exclusion, or does it simply then act as a normal capital gain for US tax purposes. (I’m in Panama). thanks.

    • Markus Markus on March 25, 2020 at 9:05 pm

      It would be Rental income and would have to be declared as such on your tax return.

  2. Avatar Ken Jones on March 21, 2020 at 1:13 pm

    I’m permanent expat with USA retirement income. Are my stock market transactions (short term loses/gains) treated the same as if I were living in the USA? Thanks.

    • Markus Markus on March 25, 2020 at 9:24 pm

      It depends on the stock transaction in particular (US stock vs. foreign companies), so we’d need to look at this in more detail.

      • Avatar Mina on May 24, 2020 at 10:25 pm

        Hi Markus, I would be interested in reading an article about this topic ^^ if you would be wiling.

        • Michelle H. Michelle H. on May 25, 2020 at 10:10 am

          We will add it to the list!

  3. Avatar tom on April 24, 2020 at 12:15 am

    Hello

    This was a useful post. Another question that I am not sure was answered is the following:

    As a US Citizen living in London, UK I understand that I will be charged the full 30% dividend tax on US shares and stocks. However, do I still incur US capital gains tax as well on these investments as well?

    Thank you

    • Michelle H. Michelle H. on April 26, 2020 at 6:28 am

      We can’t speak on UK taxation of your investment income. Your investments would still be taxable by the IRS and you could use UK income tax paid on them to offset the US taxes.

  4. Avatar Derek Jones on May 19, 2020 at 4:59 pm

    Not covered here, but how is foreign currency factored into the calculations?

    • Michelle H. Michelle H. on May 26, 2020 at 11:11 am

      Hi Derek, if your asset was purchased/sold in a foreign currency, you have to factor in the foreign exchange rate at the date purchased/sold to get an accurate USD amount for the gains/loss!

  5. Avatar Mort on July 7, 2020 at 8:06 am

    Hi Michelle,
    I am a US Citizen and permanently living in my main residence in the NL. I bought the place 20 years ago and has appreciated (doubled) now.
    I decided to rent part of my house (66%) few mounts ago but still live in the rest. I am decalring the income to NL tax authorities and also US as income.
    I have been told that I will be subjected to Capital Gains(CG) if i sell it ; say ; next year. IRS website talks about the basis for CG to be the purchase price of 20 years ago ?. IS this correct ?. What about Fair Market Value at the time of rental ?.
    Will IRS expect that I share 20 years of appreciation of the house with them ; solely because I rented a couple rooms in my house for a couple of years ?

    • Michelle H. Michelle H. on July 7, 2020 at 2:18 pm

      Hi Mort,
      Let’s discuss this via email. Could you please write to us at support@myexpattaxes.com? Thanks!

  6. Avatar Suri on July 11, 2020 at 10:01 pm

    i’m a resident Tax filer of USA . i have sold my India Property and i got a profit on it.
    Ex : Purchase value $20K and sell value : $ 65K , so profit on it is $45k and i paid taxes in India.
    So i want to understand how the tax treatment would be done in USA Resident tax filing.

    • Michelle H. Michelle H. on July 14, 2020 at 3:42 pm

      Hi Suri,

      We can help you understand the tax treatment from the profit of your home once you sign into our app!

  7. Avatar Steve on July 15, 2020 at 3:01 am

    Great article.
    I would like to know if I’m a U.S citizen and i moved to another country and lived there ( i hold that country passport too) and I Trade U.S stocks from there. What tax rate would I be paying on my capital gain to the IRS ( i trade short term)

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