U.S. citizens and lawful permanent residents are generally taxed on their worldwide income, including income from the sale of foreign stocks. However, the U.S. Internal Revenue Code contains provisions that sometimes allow you to pay a preferential tax rate on income derived from the sale of stock and, in some cases, no tax at all on profit derived from the sale of foreign stock.
General Taxation Scheme
If you hold your stock for a year or more before you sell it, you might become liable for capital gains tax on your profits, instead of ordinary income tax. Fortunately, capital gains tax rates are typically lower than ordinary income tax rates. Even if you enjoy a capital gain on the sale of stock, however, you only have to pay capital gains tax if you enjoy a net capital gain for the entire tax year over all transactions involving capital assets. Capital assets include nearly all property, except for certain narrow exceptions such as business inventory and accounts receivable. If you hold your stock for less than a year before selling it, your profit will be taxed at ordinary income tax rates.
Foreign Tax Credit
Despite the taxation scheme described in Section 1, the foreign tax credit is generally available to you if your income is otherwise taxable under the laws of both the United States and a foreign nation. Because it is a tax credit rather than a tax deduction, you may deduct the amount of foreign taxes actually paid or assessed from your U.S. taxes due on the same transaction. If the foreign tax equals or exceeds your U.S. tax burden, you won’t have to pay any U.S. tax on your profits from the sale of foreign stock. As an alternative to the foreign tax credit, the U.S. also allows you to deduct foreign taxes paid from your taxable income; however, the credit will almost always save you more than the deduction.
Foreign Earned Income Exclusion
You can exclude up to $95,100 of otherwise taxable income (as of the 2012 tax year) earned while physically present abroad if you meet certain requirements. Generally, to qualify for the foreign earned income exclusion, you must have lived abroad for most of the tax year during which you claim the exclusion or during most of the previous tax year. The foreign earned income exclusion is an alternative to the foreign tax credit – you can’t add both to eliminate your U.S. tax liability.
The United States does not offer the foreign tax credit or deduction, or the foreign earned income exclusion with respect to taxes imposed by certain nations, such as Cuba, Iran and North Korea, which the secretary of state has designated as supporting international terrorism. Consequently, you may face double taxation for profits realized from the sale of stock that is taxable by one of these nations. On the other hand, a jurisdiction may be eligible for the foreign tax credit despite lacking formal diplomatic recognition from the United States (Taiwan, for example).
- Internal Revenue Service: Foreign Tax Credit for Individuals
- Bankrate.com: Form 1099-B Now Has Cost Basis Information
- Internal Revenue Service: Ten Important Facts About Capital Gains and Losses
- Internal Revenue Service: Investment Income and Expenses
- Greenback Expat Tax Services: US Expat Taxes Explained Series: The Foreign Tax Credit (Form 1116)
- Internal Revenue Service: Foreign Earned Income Exclusion
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.