If you’re a US citizen or resident alien living abroad, the US tax code still requires you to report your worldwide income, including any capital gains and losses from foreign investments. One of the key forms for reporting capital gains and losses is Schedule D (Capital Gains and Losses), which is attached to your Form 1040. For expats, this can be a bit tricky, as there are extra considerations when dealing with foreign investments.
What is Schedule D?
Schedule D is a tax form used to report the sale or exchange of capital assets, including stocks, bonds, real estate, cryptocurrency, and other investments. Whether these transactions occur within the US or abroad, if you’re a US taxpayer, you must report them.
Schedule D is included as part of your 1040 tax return. It helps the IRS determine the amount of capital gain or loss you have from the sale of investments, which can then affect your overall tax liability.
Reporting Foreign Capital Gains and Losses
When you sell a foreign investment, such as stocks in a foreign company or real estate located outside the US, you still need to report these gains or losses to the IRS, even though the investment is not in the US. Here’s how you can do this correctly:
Determine the Type of Gain or Loss
The first step is to determine whether the capital gain or loss is long-term or short-term. The IRS defines short-term capital gains as gains from the sale of assets held for one year or less. Any gains from assets held for more than one year are long-term.
- Short-Term Capital Gains: Taxed at ordinary income tax rates, which can be as high as 37% for the highest income earners.
- Long-Term Capital Gains: Taxed at preferential rates, which range from 0%, 15%, or 20%, depending on your overall taxable income.
Whether the asset is US-based or foreign does not affect the classification as long-term or short-term, which depends only on the holding period of the asset.
Convert Foreign Currency into US Dollars
When reporting foreign capital gains or losses, you’ll need to report the amounts in US dollars. This means that if you sold a foreign asset, you need to convert the amount you received in foreign currency into US dollars using the exchange rate on the date of the transaction.
You should use the exchange rate in effect on the date you sold the asset. For example, if you sold foreign stocks on July 1, you’ll need to use the exchange rate for July 1 to convert the foreign currency amount into US dollars.
Reporting Foreign Capital Gains and Losses on Schedule D
After determining whether the gain or loss is long-term or short-term and converting the amount to US dollars, you will report the transaction on Schedule D.
- Part I of Schedule D is for short-term capital gains and losses. Report the foreign transaction here if the asset was held for one year or less.
- Part II of Schedule D is for long-term capital gains and losses. Report the foreign transaction here if the asset was held for more than one year.
For each sale, you will need to provide:
- The description of the property (e.g., “500 shares of XYZ Corporation”).
- The date acquired.
- The date sold.
- The sale price in US dollars (after conversion).
- The cost or basis (also in US dollars after conversion).
- The resulting gain or loss.
The IRS provides worksheets in the Schedule D instructions that can help you determine the proper amount of your capital gain or loss.
Form 8949: Sales and Other Dispositions of Capital Assets
For most taxpayers, Form 8949, “Sales and Other Dispositions of Capital Assets,” will be used in conjunction with Schedule D. Form 8949 is where you list the details of each capital asset transaction, including foreign assets. The information from Form 8949 is then transferred to Schedule D.
Form 8949 includes columns for the description of the asset, the date acquired, the date sold, the sale price, the cost or basis, and the resulting gain or loss. After completing Form 8949, the totals are transferred to Schedule D.
Note that if the foreign asset was acquired before 2011, special rules may apply regarding reporting the cost basis. You may need to attach additional documentation or use different procedures for reporting these older assets.
Additional Considerations for Foreign Investments
When dealing with foreign capital gains and losses, there are a few other important things to consider:
Foreign Tax Credit
Many countries impose taxes on income, including capital gains. If you’ve paid foreign taxes on your capital gains, you may be eligible for a Foreign Tax Credit on your US tax return. This credit helps to offset the potential for double taxation. You’ll need to complete Form 1116 to claim the credit.
Alternatively, if you choose not to claim the foreign tax credit, you might be able to deduct foreign taxes as an itemized deduction, but you’ll need to determine which option provides the greatest benefit to you.
Foreign Financial Assets and FATCA Reporting
If you hold significant foreign assets (such as foreign bank accounts, stocks, or other financial instruments), you may be subject to additional reporting under the Foreign Account Tax Compliance Act (FATCA). This requires you to report foreign financial assets using Form 8938 along with your tax return if the value of these assets exceeds certain thresholds.
Currency Fluctuations and Foreign Assets
The value of foreign currency can fluctuate, and this can impact your gain or loss calculation. If the value of the foreign currency changed between the time you bought and sold an asset, you may need to account for that when calculating your capital gains or losses.
For instance, if you sold a foreign asset and the value of the foreign currency decreased relative to the US dollar, it could result in a smaller gain (or a larger loss) than you initially anticipated.
Reporting foreign capital gains and losses on your US taxes is an important part of filing your tax return as a US citizen or resident living abroad. By using Schedule D, Form 8949, and carefully converting foreign amounts into US dollars, you can ensure you meet all reporting requirements. It’s also important to consider any foreign taxes paid, potential eligibility for the Foreign Tax Credit, and whether you need to file additional forms such as Form 8938 or Form 1116.
