If you have made or lost money through the sale of stocks, investments or other assets, you are required to report these transactions via Schedule D (Capital Gains and Losses) when filing US taxes abroad. Capital gains and losses are reportable when an asset is sold or otherwise disposed, regardless of the value of the transaction.
Schedule D requires you to report basic details concerning the assets, including:
- Initial purchase price
- Purchase date
- Sale price
- Sale date
This seems direct enough, but can be quite challenging for assets that have been held for several years. For most taxpayers, the most difficult part about completing Schedule D of their US expat taxes is gathering the documentation. This issue is compounded when the taxpayer travels frequently and has paperwork scattered in different parts of the world.
Short-Term or Long-Term Capital Gains
After the necessary documentation has been gathered regarding the sold or disposed assets, the next step is to determine the length of ownership. If the assets were held for one year or less, they are considered “short-term” assets on your US expat taxes and will be reported in Part I of the Schedule D. Anything held over one year will be reported in Part II of Schedule D.
The distinction between the ownership periods is important because different tax rates apply to short-term and long-term assets. Gains from assets held for less than one year will be subject to ordinary income tax rates (i.e. your highest tax bracket associated with your US expat taxes). Long-term assets are eligible for reduced “capital gains” tax rates, which can be 15% or even 0% depending on the individual situation.
Completing Schedule D for US Expat Taxes: Blake and Lauren Expat
Earlier in our US Expat Taxes Explained series, you were introduced to Blake & Lauren Expat: Montana natives who moved abroad to become professional samba dancers. With some of the money they made from Lauren’s success, they invested in various stocks through a US brokerage house in August 2010. By May 2011, one of their investments had more than tripled in value, and they couldn’t resist the temptation to sell it. In October 2011, Blake lost his job, and they sold more stock to help cover their living expenses. In February 2012, they receive a package from their brokerage house with several documents.
The first document looks like this:
You will notice that this is missing some of the key information required by Schedule D: the purchase date and price. The only thing that the IRS requires to be reported on the 1099-B issued by the brokerage house is the information regarding the sale of the asset, not the purchase. If you’re lucky, you can look further through the package provided by the brokerage house and find this:
Some taxpayers are not lucky enough to have this information provided to them so readily, as it is not required by the IRS. This is why document retention with regards to stocks is so important! When you make investments, it’s very important to keep accurate documentation from the very beginning, so it is available for your US expat taxes. Do not rely on your brokerage house to provide you the documentation when necessary. Although many are prepared for you to request the documentation, some are not and this creates quite a headache for many taxpayers. You are the person responsible for reporting the information to the IRS, and it is dangerous to rely on anyone else to provide it to you.
Part I: Short Term Capital Gains or Losses on your US Expat Taxes
Using the information provided to them by their brokerage house, Blake and Lauren can begin completing their Schedule D. The form, as well as all of the forms associated with their US expat taxes, can be downloaded from the Internal Revenue Service website. They will report the sale of their 100 shares of Samba R Us Fund in Part I, because this stock was held for less than a year.
You can see that the detailed information comes straight from the documentation provided by the brokerage house. If you need additional space, you can complete Schedule D-1, and provide the totals from that supplemental form on Line 2. It’s important to note that the IRS will compare what is reported on Line 3 (and Line 10 of Part II) to the information reported to them via Forms 1099-B. Use Lines 4 and 5 to report capital transaction information from other forms required on your US expat taxes. Capital losses are used to offset capital gains first, then a portion of ordinary income. Any excess capital losses can be carried over to offset capital gains in future tax years. You can report any capital loss carryovers on Line 6. Finally, summing column f for all of Part I will provide your net short term gain or loss. For Blake & Lauren, they will report a short term capital gain of $2,750 which will be taxed at ordinary rates.
Part II: Long-Term Capital Gains or Losses on your US Expat Taxes
Again, using the information provided by the brokerage house, Part II of Blake & Lauren’s Schedule D can be completed as follows:
Unfortunately, they incurred losses with the sales of their long term stocks. This long term capital loss can be used to offset the short term capital gain, and the net will be taxed at ordinary tax rates on Blake and Lauren’s US expat taxes. Notice that when Line 3 (Part I) and Line 10 (Part II) are combined, it equals the Gross Proceeds reported to Blake and Lauren from their brokerage house on their 1099-R. Similar to Part I, Lines 11 and 12 are transfers from other forms from a taxpayer’s US expat taxes. Blake and Lauren are lucky enough to not have anything to report here. If you have something you think may be reportable here, you might want to enlist the help of a US expat tax professional. Capital gain distributions are proceeds received from a mutual fund’s investment portfolio. These distributions are reported to taxpayers via Form 1099-DIV. Combining column f of Part II will provide you with the net long term capital gain or loss.
Part III: Summary
Parts I and II of Schedule D are the hard parts. Once those have been completed in their entirety, the rest is just math and following instructions. Part III of Blake and Lauren’s Schedule D is completed as follows:
As you can see, Part III is fairly straightforward. Blake and Lauren’s long term capital loss was netted against their short term capital gain for a total capital gain of $2,475. This amount will be taxed at ordinary rates and reported on Line 13 of Blake and Lauren’s Form 1040 of their US expat taxes.
This form can get quite a bit more complicated if you’re dealing with a net loss, or additional complexities from partnerships, sale of small business stock, collectibles, etc. If you have any of these situations, please consult a tax professional to assist with your US expat taxes.
More Information about Filing US Taxes Abroad
We have another post here that details capital gains and their affects on your US expat taxes. If you need help preparing your Schedule D or would like to learn about our expat tax services, please contact us.