Dealing with cross-border taxes can often be confusing. Since you deal with the regulations of two countries, you may need to put in some extra hours to grasp the processes.
Foreign Capital Gains taxes are not the new concepts. The concept may appear as simple as possible; however, the rules involved under its umbrella can make the scenarios complex to understand.
In this article, we have thoroughly discussed capital gain taxes on your foreign property. Moreover, we have listed details about different regulations you may need to know and tax forms you may need to submit while filing foreign capital gains.
Basics About Foreign Capital Gain Tax
Consider a simple example; you bought a property in Canada. After some time, you decided to sell it. Any gain or loss you received after subtracting the cost basis (original value + processing fee) is called capital profit (in case of profit) or capital loss (in case of loss).
Foreign capital gains occur on your property and investment. Any physical commodity like a house or jewelry comes under the umbrella of property. Meanwhile, any stock or bonds you owe comes under the umbrella of investments.
However, the general rule remains the same.
If the selling price increases the cost basis, it will be categorized into capital gain, which is taxable by applying different rules of the IRS.
Types of Foreign Capital Gains
The IRS divides capital gains into two parts to impose taxes. There are two types of capital gains: short-term and long-term. In the coming section, we have defined each type of capital gain in detail.
a) Long Term Capital Gains
As obvious by the name itself, if you hold a property for more than one year, you will be taxed on long-term capital gains. You are required to report your long-term capital gains on Part II of Schedule D.
The taxation rates are different for both categories.
If you are dealing with long-term capital gains, you can avail reduced tax rates on your capital gains. The rate for reduced tax rate can be 15%. Moreover, it depends upon your financial situation, and in some cases, it can be 0%.
We would recommend consulting a professional CPA to understand your taxes correctly.
b) Short Term Capital Gains
If you hold your assets for one year or less than one year, you will be taxed on short-term capital gains. You are required to report your short-term capital gains on Part I of Schedule D.
Moreover, short-term capital gains are reported under your ordinary income tax rates.
Essential Points to Note While Calculating Your Foreign Capital Gains
The taxation process may demand any of your financial data to comply with different processes. However, we have gathered the top-3 general points you may need to note while calculating your foreign capital gains on your properties.
1 – Calculating Your Cost Basis
The cost basis is the original price of the property plus any fee involved in the process of holding that property.
For example, you bought a property in Canada for $120,000. The cost was divided into two parts: the original price of the property ($110,000), and the sales tax imposed on your purchase ($10,000).
Moreover, you also spent $5,000 on the property maintenance.
The total cost basis in this scenario will be:
= Original Price + Sales Tax + Maintenance Charges
The total amount for the cost basis will be $125,000.
It’s also important to note that the cost basis does not always increase. In some cases, it decreases as well. For example, if you receive any insurance benefits on your property, you will decrease your cost basis.
While selling your property and calculating your foreign capital gains, it is necessary that you calculate your cost basis to decide if it’s a capital gain/loss.
2 – Purchasing/Selling Date and Holding Period.
As mentioned earlier, the taxation rates have variability depending upon the length of holding your asset (long/short term capital gains). You need to make sure that the holding period has been documented.
Moreover, alongside the holding period, you should take note of your selling and purchasing dates.
3 – Converting Your Foreign Currency into the U.S. Dollars
The IRS regulations demand you to convert your foreign currency to the U.S. dollar while calculating your capital gains and losses. You need to report your foreign capital gains by comparing them with the present market value of the U.S. dollars.
You need to note your selling price, buying price, and cost basis in the U.S. dollars. Your profits and losses are calculated in the U.S. dollars.
Reporting Your Foreign Capital Gains Taxes
To report your foreign capital gain on the U.S. tax return, you will use Schedule D of Form 1040.
Some of the points you may need to include while filing your capital gains:
- Property details
- Selling price
- Purchase price
- Selling date
- Purchase date
You can reduce your taxable income by reporting net capital losses. Moreover, if your losses exceed $3,000, they will be carried forward to next year considering you haven’t claimed them on your tax returns.
Moreover, you can reduce your taxes by using the Foreign Tax Credit and Foreign Earned Income Exclusion.
It is also important to note that you can NOT use Foreign Earned Income Exclusion to take off capital gains taxes. However, the foreign tax credit can be helpful in such cases
Reduce Your Foreign Capital Gains Taxes with AkifCPA
At AkifCPA, we have spent years understanding the complex challenges of taxation. We make sure that people save their money with us.
To reduce your taxes and file them accurately, contact us today.