U.S. TAX GUIDE IN INDIA

Do US expats in India need to disclose their investment profits to the IRS?

Yes, if you are a US citizen or green card holder living in India, you are required to report any profits from assets such as stocks or cryptocurrency to the IRS. The United States taxes global income, which means you must include these gains on your return, even if you have paid Indian taxes on them.

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Skipping this disclosure can lead to fines or an audit, especially as the IRS has become more vigilant about cross-border financial dealings. 

You can often claim a foreign tax credit to prevent double taxation, but you have to file the right forms and keep careful documentation of what you paid in India.

Which IRS rules apply to Indian mutual funds and stocks?

The IRS labels foreign mutual funds as passive foreign investment companies (PFICs). This classification results in extra filing obligations, commonly through Form 8621, for each PFIC you own. 

Failing to submit this form can trigger penalties starting at US$10,000 per instance. Many Indian mutual funds, such as those offered by local banks or asset managers, typically count as PFICs under US rules. 

In contrast, if you hold individual stocks and sell them, you simply report capital gains or losses on your US return, much as you would with domestic stocks.

Does the IRS treat foreign mutual funds differently than stocks?

US laws set stricter standards for overseas mutual funds to discourage people from using them without full awareness of the compliance details. Under PFIC regulations, gains or dividends from these funds may face complicated tax calculations, and the penalty for not disclosing them can be steep. 

Meanwhile, shares in individual companies do not fall under PFIC rules, so reporting them is more straightforward. 

You generally report any net profit or loss when you sell, and if you held the shares for more than a year, you may be eligible for reduced long-term capital gains rates in the United States.

Would individual stocks be easier for US citizens living abroad?

Many expats find that sticking to individual equities simplifies reporting, since standard capital gains rules apply. When you sell your shares, the taxable profit is just the selling price minus the original cost, including certain transaction fees. 

If you realize a profit after more than a year, you can benefit from lower US long-term capital gains tax rates. 

However, you still have to comply with rules on foreign account disclosure if your accounts exceed certain thresholds. 

The FBAR (Foreign Bank Account Report) and Form 8938 requirements still stand, but they do not create the same complexities or potential higher tax burdens that PFICs do.

Does cryptocurrency face different taxes in India and the US?

Yes. India has a flat tax rate on crypto gains, which can be relatively high and does not always distinguish between short-term and long-term gains. 

The US regards crypto as property, so it uses capital gains or losses for each transaction, with long-term gains often taxed at lower rates. 

If you owe taxes on crypto in India and also owe taxes to the US, a foreign tax credit could lower your total US tax, provided you file the appropriate forms. 

You must maintain accurate records of each purchase and sale price in dollars to determine your gain or loss for US filings.

What can I do to simplify investing as a US citizen overseas?

  • Invest in US-based funds through American brokerages. This avoids PFIC rules.
  • Focus on individual stocks, which follow simpler reporting.
  • Keep detailed records on any crypto trades, noting when and at what cost you purchased and sold.
  • Consult a professional who understands both Indian and US tax regulations to make sure your portfolio suits cross-border requirements.

Should US citizens living in India still consider foreign mutual funds?

Although foreign mutual funds can offer appealing returns or diversification, they bring extra compliance requirements under PFIC regulations, along with steeper tax rates on gains and distributions. 

Some expats still hold them for portfolio balance, but many decide that the extra paperwork is not worth it.

If you invest through a US brokerage, you can access a wide range of US-based mutual funds that do not have PFIC status. This approach typically cuts down on annual filings and lessens the risk of large penalties.

In what ways can a professional tax advisor support US expats with cross-border investments?

  • Calculate your foreign tax credits and complete forms correctly to prevent double taxation.
  • Help you navigate PFIC disclosures, including Form 8621, if you already hold foreign funds.
  • Clarify how your crypto trading is taxed in each country, avoiding mistakes in reporting.
  • Suggest investment strategies that reduce the risk of penalties, whether you prefer stocks or funds.
  • Address account disclosure rules like FBAR and Form 8938 to keep you compliant. Having this guidance ensures that you do not miss key deadlines or overlook critical information.