u.s. expat tax guide – chile
How do US expats in Chile report capital gains from stocks, shares, and crypto?
If you are a US citizen or green card holder, you must report capital gains from stocks, shares, and cryptocurrency on your US tax return, even if you live abroad or hold these assets in a foreign country.
The IRS requires full disclosure to ensure compliance.
What are capital gains, and how are they calculated?
A capital gain happens when you sell an asset for more than you paid for it. A capital loss occurs when you sell it for less. The profit or loss is determined as follows:
- Cost Basis: The original price you paid for the asset, including any fees.
- Sale Price: The amount you received from selling it.
- Capital Gain or Loss: Sale price minus cost basis.
Example:
- You bought stocks for US$5,000 and later sold them for US$8,000 → US$3,000 gain.
- You bought stocks for US$5,000 and sold them for US$4,000 → US$1,000 loss.
How does the IRS tax capital gains?
The IRS applies different tax rates based on how long you held the investment:
- Long-Term Capital Gains (Held over one year): Taxed at 0%, 15%, or 20%, depending on your total income.
- Short-Term Capital Gains (Held one year or less): Taxed as regular income, with rates between 10% and 37%.
Can capital losses reduce taxes?
Yes. If you lose money on investments, you can use those losses to lower your tax bill:
- Offset Capital Gains: If you had US$5,000 in gains and US$2,000 in losses, you’re taxed only on US$3,000.
- Carry Forward Extra Losses: If your losses exceed your gains, you can apply up to US$3,000 per year against other income and carry forward the rest for future years.
How is cryptocurrency taxed?
The IRS treats cryptocurrency like property, meaning you must report every sale, trade, or transaction as a taxable event.
Example:
- You bought Bitcoin for US$10,000 and sold it for US$20,000, the US$10,000 profit is a capital gain.
- If you traded Bitcoin for Ethereum, that’s also a taxable event, based on the value at the time of exchange.
Cryptocurrency only becomes taxable when sold, traded, or used—simply holding it is not taxable.
How does cryptocurrency generate taxable income?
- Selling for a Profit: If you sell cryptocurrency for more than what you paid, the profit is a capital gain and is taxed.
- Trading for Another Cryptocurrency: Exchanging Bitcoin for Ethereum, for example, is a taxable event. The IRS sees this as selling one asset and buying another, so any gain is reportable.
- Using Crypto to Pay for Goods or Services: If you buy something with crypto, and its value has increased since you acquired it, you have a taxable gain.
- Receiving Crypto as Payment: If you receive crypto as payment for work or services, it is treated as earned income and taxed at ordinary rates.
- Mining and Staking Rewards: Any cryptocurrency received from mining or staking is taxed as ordinary income based on its value at the time you received it.
- Airdrops and Hard Forks: If you receive free crypto from an airdrop or a blockchain split (hard fork), you must report it as income.
Since every taxable event must be reported, keeping records of all crypto transactions is important to calculate gains, losses, and potential tax deductions.
Can cryptocurrency be excluded from US tax returns?
No, cryptocurrency must always be reported if it results in a taxable event. Unlike some foreign income that may be excluded under special IRS rules, cryptocurrency gains and earnings are fully taxable.
Common Misconceptions About Crypto Taxation:
- Holding Crypto Is Not Taxable: Simply holding crypto in a wallet or exchange does not create a taxable event. You are only taxed when you sell, trade, or use it.
- Foreign Earned Income Exclusion (FEIE) Does Not Apply: If you are a US expat, you may qualify for the Foreign Earned Income Exclusion (FEIE) for wages earned abroad, but crypto sales and capital gains do not qualify for this exclusion.
- Using Crypto for Everyday Purchases Still Creates Taxable Events: Even small transactions, like buying a coffee with Bitcoin, can trigger capital gains tax if the value has increased since you acquired it.
- Tax Exemption Limits: The IRS does not offer a special tax exemption for crypto. Even small transactions must be reported.
Gains from Foreign Exchanges Must Be Reported: If you use a non-US crypto exchange, your transactions are still subject to US tax laws.
How should you report cryptocurrency transactions on US taxes?
To properly report cryptocurrency transactions, you must include them on your US tax return using specific IRS forms.
Steps for reporting crypto on US taxes:
- Keep Track of Every Transaction:
- Record the purchase price, date acquired, date sold, and sale price for each transaction.
- Include any trading fees or transaction costs, as these may reduce your taxable gain.
- Determine Your Capital Gain or Loss:
- Capital Gain = Sale Price – Cost Basis (original purchase price).
- Losses can be used to offset other taxable gains.
- Select an Accounting Method:
- FIFO (First In, First Out): The oldest crypto purchases are sold first.
- LIFO (Last In, First Out): The most recent purchases are sold first.
- HIFO (Highest In, First Out): The most expensive purchases are sold first, potentially reducing tax liability.
- Use the Correct IRS Forms:
- Form 8949: Reports each individual crypto sale or trade.
- Schedule D: Summarizes your total capital gains and losses.
- Form 1040: If you received crypto as income (mining, staking, or payment for services), report it as ordinary income.
- Form 709 (Gift Tax Return): If you gifted more than US$18,000 worth of crypto in 2024, this form is required.
- Claim the Foreign Tax Credit (if applicable):
- If you paid foreign taxes on crypto transactions in another country, you may be able to offset US taxes using Form 1116.
- Check If You Need to File an FBAR or FATCA Report:
- If you hold crypto on a foreign exchange, it may be reportable under FBAR (Foreign Bank Account Report) or FATCA (Foreign Account Tax Compliance Act).
How does Chile tax capital gains?
If you live in Chile, you may have to pay local taxes on investment gains.
Chile taxes:
- Residents on their worldwide income (including foreign investment gains).
- Non-Residents only on Chilean income (such as local stocks or property).
Chilean capital gains tax rates vary depending on how long you held the asset and its type.
Can Chilean taxes lower US taxes?
Yes. If you paid capital gains tax in Chile, you can reduce your US tax bill using the Foreign Tax Credit (FTC):
- First, pay capital gains tax in Chile (if required).
- Then, claim a Foreign Tax Credit (Form 1116) to subtract Chilean taxes from your US tax liability.
How do I report capital gains to the IRS?
To report your capital gains or losses:
- Use Schedule D: Summarizes all capital gains and losses.
- Complete Form 8949: Lists each transaction (purchase price, sale price, and holding period).
- Separate Short-Term and Long-Term Gains: The IRS taxes them differently.
- Claim Foreign Tax Credit: If you paid taxes abroad, file Form 1116 to offset US taxes.
What if I don’t report my capital gains?
Not reporting capital gains can lead to:
- IRS penalties and interest charges
- Increased risk of an audit
- Higher tax liability in the future
Do US expats pay taxes in both the US and Chile?
Both countries tax capital gains, but the Foreign Tax Credit (FTC) helps avoid double taxation.
- If Chilean tax rates are higher than US rates, the FTC usually cancels US tax owed.
- If US tax rates are higher, you may owe extra US taxes after applying the FTC.
How does the US-Chile tax treaty affect US expats?
The US-Chile tax treaty clarifies which country taxes what and helps prevent double taxation:
- Capital Gains: Chile taxes first, and you can use Form 1116 to claim a Foreign Tax Credit on your US return.
- Dividends & Interest: Withholding tax is reduced, usually between 5% and 15%, making foreign investments more tax-efficient.
- Royalties & Business Profits: Taxed where they are earned, with limits on withholding taxes.
What are the best tax strategies for US expats with investments?
- Track Investment Transactions: Keep records of purchase prices, sale prices, and dates.
- Claim the Foreign Tax Credit: File Form 1116 to offset US taxes with Chilean taxes paid.
- Use Tax-Loss Harvesting: Offset gains with losses to reduce taxable income.
- Consult a Tax Professional: Work with an expert familiar with US-Chile tax laws.
