U.S. TAX GUIDE IN BRAZIL
How do capital gains on stocks, shares, and crypto work for US expats in Brazil?
If you’re a US citizen living in Brazil and you’ve made gains from trading stocks, shares, or cryptocurrencies, you’ll need to report those gains on your US tax return.
The important part here is understanding the type of gain—whether it’s short-term or long-term—because this determines how it’s taxed.
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What’s the difference between short-term and long-term capital gains?
Short-term capital gains are those made on assets you’ve held for one year or less. These gains are taxed at your ordinary income tax rate, which can be significantly higher.
Long-term capital gains, on the other hand, apply to assets held for more than one year. These gains benefit from lower tax rates, which can be a big advantage if you’ve been holding onto an investment for a while before selling.
How do I calculate my capital gains?
To calculate your capital gains, you start by determining the cost basis—this is the amount you originally paid for the asset, including any associated fees. When you sell the asset, you subtract the cost basis from the sale price.
If the sale price is higher than the cost basis, the difference is your gain, which will then be taxed depending on whether it’s a short-term or long-term gain.
Can I get a Foreign Tax Credit for taxes paid in Brazil?
Yes, generally, you can claim a Foreign Tax Credit (FTC) on your US tax return for taxes you’ve paid in Brazil on these gains.
However, it’s important to make sure the type of investment qualifies, as different rules might apply depending on the nature of the asset and how the gains were realized.
What is the tax rate on short and long-term capital gains for US expats?
The tax rates on capital gains for US expats are the same as for people living in the US. The rate you pay depends on whether the gains are short-term or long-term.
- Short-Term Capital Gains: These are taxed at the same rates as your regular income, which can range from 10% to 37%, depending on your total income.
- Long-Term Capital Gains: These gains are taxed at lower rates—either 0%, 15%, or 20%—depending on your overall income for the year.
How does the IRS treat capital gains from foreign mutual funds?
When it comes to foreign mutual funds, the IRS has some special rules that can make things a bit complicated.
Most foreign mutual funds are treated as Passive Foreign Investment Companies (PFICs) by the IRS, and the tax rules for PFICs are not as favorable as those for US-based mutual funds.
Here’s how it works:
- PFIC Rules: If your foreign mutual fund is considered a PFIC, the taxes can be higher and more complex. Gains from PFICs are often taxed at the highest ordinary income tax rate, no matter how long you’ve held the investment. Additionally, there could be an interest charge on the tax due for each year the PFIC was held.
- Reporting Requirements: If you own shares in a PFIC, you’ll need to file Form 8621 with your tax return. This form reports your income, gains, and any distributions from the PFIC. Not filing this form can lead to significant penalties.
- Mark-to-Market Election: Some people choose to make a “mark-to-market” election, which means you report the PFIC each year and pay taxes on any gains, even if you haven’t sold the shares. This can simplify things but might result in higher taxes right away.
Because the rules around PFICs are complicated and the taxes can be high, many US expats choose not to invest in foreign mutual funds. If you do have PFICs, it’s a good idea to work with a tax professional who understands these rules.
Are there special reporting requirements for foreign crypto assets in the US?
Yes, if you hold cryptocurrency in foreign accounts or exchanges, there are specific reporting requirements you need to follow.
The IRS treats cryptocurrencies as property, so any time you sell or trade them, you have to report the gain or loss on your US tax return. Additionally, if your foreign-held crypto exceeds certain thresholds, you might have to report it separately.
In addition to the usual reporting, there are some specific rules you need to be aware of when dealing with foreign-held crypto assets.
- Receiving Crypto Gifts: If you receive cryptocurrency as a gift from a foreign person or entity, and it’s worth more than a certain amount, you might need to file Form 3520. This form is used to report foreign gifts or inheritances. If you get a large crypto gift from someone outside the US, you might have to report it.
- Foreign Trusts and Companies: If you hold cryptocurrency within a foreign trust or corporation, there could be more forms to file. For example, Form 3520-A might be needed if you’re involved with a foreign trust, and Form 5471 might be required if you own a large part of a foreign company that holds cryptocurrency. These forms let the IRS know about your connection to these foreign entities and the assets they hold.
- Foreign Partnerships: If you’re a partner in a foreign partnership that holds cryptocurrency, you might need to file Form 8865 to report your share of the partnership’s income and other details. This form is needed if you have a significant stake in the partnership.
- Suspicious Activity Reporting: If you suspect that your foreign crypto transactions might be linked to illegal activities, you may have to file a Suspicious Activity Report (SAR) with FinCEN. This is less common but is part of the broader rules around crypto assets.
