U.S. EXPAT TAX GUIDE – BRAZIL
How do US expats handle capital gains from stocks, shares, and crypto in Brazil?
If you are a US citizen living in Brazil and have made gains from trading stocks, shares, or cryptocurrencies, you need to report those gains on your US tax return.
The type of gain—whether it’s short-term or long-term—affects how the gains are taxed.
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What’s the difference between short-term and long-term capital gains?
Short-term capital gains are gains made on assets you held for one year or less. These gains are taxed at your regular income tax rate, which can be significantly higher.
Long-term capital gains apply to assets held for more than one year. These gains are taxed at lower rates, which can be a big advantage if you hold onto an investment for a longer period before selling.
How do you calculate capital gains?
To calculate your capital gains, you start by determining the cost basis—this is the amount you originally paid for the asset, including any fees.
When you sell the asset, you subtract the cost basis from the sale price. If the sale price is higher than the cost basis, the difference is your gain. This gain is then taxed based on whether it is a short-term or long-term gain.
Can you claim a Foreign Tax Credit for taxes paid in Brazil?
Yes, you can usually claim a Foreign Tax Credit (FTC) on your US tax return for taxes paid in Brazil on these gains. However, it’s important to make sure that the investment qualifies, as different rules may apply depending on the asset type and how the gains were realized.
What are the tax rates for short-term and long-term capital gains for US expats?
The tax rates for capital gains are the same for US expats as they are for residents in the US. The rate you pay depends on whether the gains are short-term or long-term.
- Short-Term Capital Gains: These are taxed at your regular income tax rates, which can range from 10% to 37% depending on your total income.
- Long-Term Capital Gains: These are taxed at lower rates of 0%, 15%, or 20%, depending on your overall income for the year.
How are capital gains from foreign mutual funds taxed?
Foreign mutual funds are subject to special IRS rules and are often classified as Passive Foreign Investment Companies (PFICs). The tax treatment for PFICs can be less favorable compared to US-based mutual funds.
Here’s what you need to know:
- PFIC Rules: If your foreign mutual fund is considered a PFIC, taxes on gains can be higher and more complicated. Gains from PFICs are often taxed at the highest ordinary income tax rate, regardless of how long you held the investment. You may also face an interest charge on the tax due for each year the PFIC was held.
- Reporting Requirements: If you own shares in a PFIC, you need to file Form 8621 with your tax return. This form reports income, gains, and distributions from the PFIC. Not filing this form can lead to significant penalties.
- Mark-to-Market Election: Some expats choose to make a “mark-to-market” election, meaning they report the PFIC each year and pay taxes on gains even if they haven’t sold the shares. This may simplify the process but could result in higher taxes immediately.
What are the rules for reporting foreign-held crypto assets?
If you hold cryptocurrency in foreign accounts or exchanges, you have specific reporting requirements.
The IRS treats cryptocurrencies as property, which means you must report any gain or loss each time you sell or trade them. Additionally, if your foreign-held crypto exceeds certain thresholds, you might need to report it separately.
Here are some specific rules for foreign-held crypto assets:
- Receiving Crypto Gifts: If you receive cryptocurrency as a gift from a foreign person or entity and it’s worth more than a certain amount, you may need to file Form 3520 to report the gift.
- Foreign Trusts and Companies: If you hold cryptocurrency within a foreign trust or corporation, you may need to file forms like Form 3520-A for foreign trusts or Form 5471 if you own part of a foreign company that holds cryptocurrency. These forms notify the IRS of your connection to foreign entities and their assets.
- Foreign Partnerships: If you are a partner in a foreign partnership that holds cryptocurrency, you may need to file Form 8865 to report your share of the partnership’s income. This is required if you have a significant stake in the partnership.
- Suspicious Activity Reporting: In rare cases, if you suspect your foreign crypto transactions are linked to illegal activities, you may need to file a Suspicious Activity Report (SAR) with FinCEN.
How can a tax professional help with foreign capital gains?
A tax professional can help you:
- Determine Your Cost Basis: Calculate your cost basis correctly to ensure your gains are reported accurately.
- File Required Forms: Assist with filing forms such as Form 8621 for PFICs, Form 3520 for foreign gifts, and Form 8865 for foreign partnerships.
- Claim Credits: Ensure you properly claim the Foreign Tax Credit to avoid double taxation.
- Avoid Penalties: Make sure all necessary forms are filed on time to prevent penalties.
What should US expats know about selling crypto assets in foreign accounts?
Selling or trading cryptocurrency held in foreign accounts can trigger additional reporting requirements. The IRS treats cryptocurrencies as property, so each time you sell or trade, you must report the transaction.
If your cryptocurrency is held in a foreign exchange and exceeds US$10,000, you may also need to file a Foreign Bank Account Report (FBAR). This report lets the US government know about foreign financial accounts, and failing to file it can lead to significant penalties.
How can capital losses help reduce your taxes?
If you have capital losses—meaning you sold an asset for less than you paid for it—you can use these losses to offset your gains. This is true for both US and foreign assets.
If your losses exceed your gains, you can use them to reduce other taxable income by up to US$3,000 per year (or US$1,500 if married filing separately). Any remaining losses can be carried over to future years.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in Germany. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.
