Capital Gains Tax for US Expats – What You Need to Know

If you’re about to sell (or are considering selling) a substantial amount in assets, the capital gains tax is likely top of mind. While capital gains taxes can be complex in general, Americans living abroad must take additional factors into account.

Failing to weigh the tax implications before carrying out a sale can take a significant bite out of your earnings. On the other hand, understanding and planning for capital gains taxes will help you optimize your investments and maintain tax compliance.

As a tax firm specializing in United States expat taxes, we have plenty of experience helping our clients strategize and mitigate capital gains taxes. Read on as we answer questions like “what is the capital gains tax,” “do expats pay capital gains taxes,” “how to avoid capital gains taxes on foreign property,” and more.

Capital gains tax basics for US expats

As you may already know, moving abroad doesn’t let you off the hook for US taxes. All American citizens and permanent residents — even those who live abroad — earning income above a certain threshold must file a federal tax return. They may also need to pay US taxes, including capital gains taxes, on their worldwide income.

Capital gains are the profits you earn when an asset’s sale price is greater than its acquisition value. Capital gains taxes, then, are the taxes you pay on that profit. Capital losses, in contrast, refer to the amount of money you lose from selling assets for less than the acquisition price.

There are two different categories of capital gains tax rates:

Short-term capital gains 

Short-term capital gains refer to profits earned after selling an asset or assets held for a year or less. These profits are taxed as ordinary income (rates range from 10% to 37%), depending on your overall taxable income.

2024 Short-term capital gains tax rates

	Taxable Income
	Single	Married filing jointly	Married filing separately	Head of household
10%	Up to $11,600	Up to $23,200	Up to $11,600	Up to $16,550
12%	$11,601 – $47,150	$23,201 – $94,300	$11,601 – $47,150	$16,551 – $63,100
22%	$47,151 – $100,525	$94,301 – $201,050	$47,151 – $100,525	$63,101 – $100,500
24%	$100,526 – $191,950	$201,051 – $383,900	$100,526 – $191,950	$100,501 – $191,950
32%	$191,951 – $243,725	$383,901 – $487,450	$191,951 – $243,725	$191,951 – $243,700
35%	$243,726 – $609,350	$487,451 – $731,200	$243,726 – $365,600	$243,701 – $609,350
37%	$609,351+	$731,201+	$365,601+	$609,350+

2023 Short-term capital gains tax rates

	Taxable Income
	Single	Married filing jointly	Married filing separately	Head of household
10%	Up to $11,000	Up to $22,000	Up to $11,000	Up to $15,700
12%	$11,001 – $44,725	$22,001 – $89,450	$11,001 – $44,725	$15,701 – $59,850
22%	$44,726 – $95,375	$89,451 – $190,750	$44,726 – $95,375	$59,851 – $95,350
24%	$95,376 – $182,100	$190,751 – $364,200	$95,376 – $182,100	$95,351 – $182,100
32%	$182,101 – $231,250	$364,201 – $462,500	$182,101 – $231,250	$182,101 – $231,250
35%	$231,251 – $578,125	$462,501 – $693,750	$231,251 – $346,875	$231,251 – $578,100
37%	$578,126+	$693,751+	$346,876+	$578,101+

B!T note: Short-term capital gains tax brackets are the same as federal income tax brackets applicable to ordinary income.

Long-term capital gains

The more favorable long-term capital gains tax rates kick in after owning an asset for over a year before selling. Long-term capital gains tax rates are either 0%, 15%, or 20%, depending on your overall taxable income.

2024 Long-term capital gains tax rates

	Taxable Income
	Single	Married Filing Separate	Head of Household	Married Filing Jointly
0%	Up to $47,025	Up to $47,025	Up to $63,000	Up to $94,050
15%	$47,026 – $518,900	$47,026 – $291,850	$63,001 – $551,350	$94,051 – $583,750
20%	$518,900+	$291,850+	$551,350+	$583,750+

2023 Long-term capital gains tax rates

	Taxable Income
	Single	Married Filing Separate	Head of Household	Married Filing Jointly
0%	$0 to $44,625	$0 to $89,250	$0 to $44,625	$0 to $59,75
15%	$44,626 to $492,300	$89,251 to $553,850	$44,626 to $276,900	$59,751 to $523,050
20%	$492,301 or more	$553,851 or more	$276,901 or more	$523,051 or more

Note: An additional net investment income tax (NIIT) of 3.8% may apply to capital gains if you earn over $200,000 of investment income per year.

Common sources of capital gains for expats

A few of the most common sources of capital gains for expats include the sale of:

• Real estate
• Equity securities, such as:
  • Stocks
  • Mutual funds
  • Exchange-traded funds (ETFs)
• Debt securities, such as:
  • Bonds
  • Certificates of deposit

• Businesses ownership, or business interests
• Cryptocurrency, such as:
  • Bitcoin
  • Ethereum
  • Solana
  • BNB
  • DOGE

B!T note: Beyond sales of cryptocurrency, purchases or other transactions involving cryptocurrency may also be subject to capital gains taxes.

Reporting requirements for capital gains

Beyond paying taxes on capital gains, you’ll also have to report them appropriately to stay in good standing with the IRS.

Among the more common forms you may need to file when report your gains are:

• Form 1040: Usually your primary tax return form, used to report individual income and calculate taxes. Total net capital gains/losses are reported on line 7
• Schedule D: A schedule associated with Form 1040, used to report capital gains/losses in more detail
• Form 8949: For reporting each capital asset transaction and calculating the gain/loss associated with it
• Form 4797: For reporting sales of properties (e.g. real estate) associated with a business or that generate income (i.e. rental properties).

Some additional niche forms include: 

• Form 6252: For reporting property sold under an installment sale where you receive payments over time
• Form 8824: For reporting “like-kind” exchanges — assets exchanged for other assets of similar type
  • Note: Capital gains tax under a like-kind exchange may be deferred until you eventually dispose of the asset you received in the exchange
• Form 2439: For reporting undistributed capital gains from a mutual fund or real estate investment trust (REIT).

While not strictly associated with capital gains, you may also need to file the following reports if your foreign financial accounts or foreign assets exceed a certain threshold:

• FinCen 114: More commonly known as the Foreign Bank Account Report (FBAR), anyone with foreign financial accounts totaling over $10,000 must file this report 
• Form 8938: Also known as the Statement of Specified Foreign Assets, all expats with over $200,000 in foreign assets at the end of — or over $300,000 at any point during — the tax year must file this report
  • Note: Exact thresholds vary based on US residence and marital status

Expat-specific capital gains considerations

As we mentioned earlier, there can be some additional complexities when it comes to US taxes on foreign capital gains. Chief among these include:

Foreign capital gains tax implications

Expats who are tax residents of other countries are often subject to taxation on capital gains both by the US and their country of residence. This is typically the case regardless of the country the income is sourced in.

Example: Sonia is a US citizen who has been living in Germany for the last three years. Recently, she sold a vacation home located in Florida for a profit of $200,000. Before selling the Florida home, she owned it for seven years. 

The US government will tax Sonia on the $200,000 profit at a long-term capital gains rate of 15% given her overall income and the amount of time she owned the home before selling it.

However, she also has a habitual residence in Germany, making her a German tax resident, too. Even though the vacation home was in the US, German tax residents are subject to taxes on their worldwide income. As such, she is also subject to German capital gains taxes at a rate of 25% plus a 5.5% solidarity surcharge.

Between the two countries, Sonia’s capital gains tax liability on the sale of her Florida vacation home could total to over 40%. However, there are ways to potentially reduce it, as we’ll discuss later on.

Currency exchange

When filing your US taxes, you must always convert foreign-sourced income into US dollars regardless of the currency in which it was issued. Conversely, you’ll likely need to convert any US-sourced income into the local currency when filing taxes in your country of residence. To do so, you’ll need to use a reliable currency converter (Wise has a great tool on their website).

Example: Chen is an American citizen living in the UK who recently sold a large amount of her UK stock market holdings. Using an online currency converter with historical exchange rates, she finds the: 

• Stock purchase price on the day she bought them (1/16/2020): £20,000, or $26,080
• Stock sale amount on the day she sold them (07/01/2024): £80,000, or $101,188

In the UK, she reports her total capital gains on the sale as £60,000 (£80,000-£20,000). In the US, she reports her total capital gains on the sale as $75,108 ($101,188 – $26,080).

Passive Foreign Investment Companies (PFICs)

The US classifies certain types of foreign investment vehicles as Passive Foreign Investment Companies (PFICs), which face a harsh tax treatment. PFICs are defined as foreign corporations when either:

• 75% or more of their gross income is passive income (e.g. dividends, interest, royalties, rental income, annuities), OR
• 50% or more of the average value of their assets during the taxable year include assets that produce or are held to produce passive income

Typically, this includes foreign pooled investments like mutual funds or ETFs. The exact way the US taxes PFICs is complex, and can vary depending on the circumstances. 

In some cases, however — especially over long holding periods — PFIC taxes are high enough to take a major bite out of (if not completely negate) investment profits. As a result, US expats are often better off finding investment alternatives to PFICs.

Strategies to manage capital gains tax

Fortunately, there are a number of ways to reduce your capital gains tax burden. Among the options include:

• Timing your asset sales: The more beneficial long-term capital gains tax rates apply to profits from asset sales once you’ve held the asset for longer than a year. Doing so can save you up to 17% compared to short-term gains. What’s more, waiting to sell until a year when your income will be lower (like if you take a hiatus from work) can help to avoid a higher tax bracket.
• Section 121 exclusion: If you’re selling your home, you may be able to exclude a portion of your capital gains from taxation. Single filers who sell a primary home they’ve owned and lived in for at least two of the last five years can exclude up to $250,000 from taxation, while married couples filing jointly can exclude up to $500,000.
• The Foreign Tax Credit & capital gains: The Foreign Tax Credit (FTC) gives Americans dollar-for-dollar US tax credits on any foreign income taxes they’ve paid, including capital gains taxes. This often not only eliminates your US tax liability but also give you surplus credits to use on future tax bills.
• Tax treaties: The US has signed dozens of income tax treaties with other countries that prevent double taxation, at least in theory. While tricky saving clauses render much of the agreements null to US citizens, there may be exceptions that you can still take advantage of. Teachers, students, trainees, and researchers often qualify for treaty benefits.
• Tax-loss harvesting: Tax-loss harvesting is a strategy where investors sell investments that have declined in value in the same tax year as selling investments that have increased in value. The ensuing capital losses can help offset capital gains, thereby reducing taxable net capital gains income. 
• Retirement accounts: You can sell and rebalance your positions within tax-advantaged retirement accounts without triggering capital gains taxes. Distributions from 401(k)s and traditional IRAs are subject to ordinary income tax rates after you hit retirement age, while distributions from post-tax accounts like Roth IRAs are tax-free.
• Estate planning & gifting: In the US, recipients don’t have to pay federal taxes on assets they’ve been gifted or bequeathed. If they later sell an inherited or gifted asset, they will only pay capital gains taxes if the asset increases in value from when they first received it thanks to a stepped-up cost basis.
  • Note: While there is no federal gift or estate tax for recipients, some states tax inheritances and gifts. Illinois, for example, imposes a tax of up to 16% on estates valued over $4 million.

Minimize capital gains taxes with professional help

When selling or disposing of valuable assets, it’s critical to understand the tax implications. In particular, you’ll need to know how to report the gains and how the US will tax them. This information will help you stay IRS-compliant and may even help you reduce your capital gains tax rates. 

Of course, capital gains taxes can be quite complex — the information we provided above was just a brief overview. The best way to ensure tax compliance and mitigate your capital gains tax burden is to work with a licensed tax professional. With their specialized knowledge and experience, they can guarantee an accurate and optimal filing with little effort on your part.

Resources:

1. Illinois Estate Tax
2. Do Non-U.S. Citizens Pay Taxes on Money Earned Through a U.S. Internet Broker?
3. Capital Gains Tax Rates in Europe, 2024
4. Does an Individual Have to Compute Gains on a Foreign Currency Transaction?