IRS rules on taxing US expat gains from stocks, shares, and crypto.
Capital gains are distinguished into short-term and long-term, which are then treated differently, as are gains and losses from one year to the next. Different tax rates apply depending on the nature of capital gains.
Key factors include:
- Cost basis: The original value of the stock.
- Sale proceeds: The selling price.
- Dates: When the stock was acquired and sold.
The IRS distinguishes between capital gains and losses. A profit in one year can be written off against a profit in another year.
The buying and selling date is very important because they determine whether the gain is short-term (held for less than 12 months) or long-term (held for more than a year).
Capital Gains Tax (CGT) is often confusing, particularly when it involves the sale of stocks, shares, and cryptocurrencies. This topic explores how capital gains on the sale of shares are treated in the UAE.
What is the difference between short-term vs. long-term gains?
The duration the stock is held will significantly affect the CGT rate:
- Short-Term: Taxed at marginal tax rates, which vary based on income and filing status.
- Long-Term: Generally taxed at a flat rate of 20%, potentially with an additional Net Investment Income Tax of 3.8%.
Imagine you bought shares at the start of the year and sold them within 12 months, making a US$20,000 gain. This amount is added to your salary for short-term gains, influencing the tax bracket and rate applied. However, if that US$20,000 is your sole income, the tax could be minimal, and you might be eligible for the standard deduction.
Conversely, if you earn a US$60,000 salary, the US$20,000 gain increases your total income to US$80,000, affecting your tax rate accordingly.
Planning to invest in stocks, shares, or crypto? Chat with a tax pro and check if it’s best for your situation.
What does it mean to have long-term gains?
Holding an investment for over a year shifts the tax landscape:
- Tax rate: Typically between 15-20% on the investment profit alone.
- Additional taxes: There is a possibility of net investment income tax, which is 3.8%.
- Strategic selling: Timing matters.
Your tax rate can also be zero, depending on your filing status and income. Therefore, it’s crucial to consult a tax professional before selling, especially if you’re nearing the 12-month threshold. An estimated calculation might reveal significant tax savings if you wait a little longer to transition from short-term to long-term classification.
The essence of smart tax planning is clear: perform tax calculations before selling.
Whether to sell now or later can have tax implications, and prior planning can guide you to a more favorable financial outcome.
Does the foreign exchange rate impact my CGT?
It’s important to note that the US dollar exchange rate can also affect your profit or loss. The exchange rate when you buy shares is almost certain to be different from when you sell, so there is an additional gain or loss on the exchange rate, which is also a factor.
Is investing in the UAE beneficial for me?
Yes, for US expats seeking tax-free income & wealth growth, the UAE also offers a tax-free capital gains structure for investors, emphasizing its potential benefits and attractiveness as an investment destination.
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Do I need to file a tax return if I live in UAE?
Am I eligible for Foreign Earned Income Exclusion? Learn from Tanveer Mannan, a highly experienced IRS Enrolled Agent based in Dubai. Having worked at EY and PWC before joining EXPAT US TAX, Tanveer has 15 years’ experience of helping Americans get the correct advice when they come to work in UAE. Getting the correct tax […]
Aya Takriti, an IRS Enrolled Agent with 11 years of expat tax experience, specializes in US tax preparation, tax planning and tax advice for US citizens and Green Card holders living and working in the Middle East. *Schedule a consultation with Aya today.
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