How are Gains Generated from the Disposal of Shares in Foreign Companies Taxed in the US

Arin V., EA , MBA

Arin is an Enrolled Agent (EA), authorized to represent taxpayers in front of the IRS, and holds a BA and MBA (Management) degree from California State University, Northridge.

In a previous article, we discussed the taxation and reporting requirements around foreign dividends paid to U.S. residents and citizens, by foreign companies. Today, we will be discussing a similar topic: how are gains generated from the sale of shares in foreign companies taxed in the U.S.?

You will be pleased to know that gains from the sale of shares of individual foreign companies are treated exactly the same way as they would be if you were to sell shares of a U.S. company that is traded on the U.S. stock market. The sales of the shares would be reported on Form 8949 and Schedule D of Form 1040 of your U.S. tax return. 

When reporting gains from the sale of foreign shares, two things to take note of immediately are the holding period, and of course, the gain on the investments, which would be the sales price minus your cost basis. 

The reason the holding period is important is that depending upon whether the gain is a short-term or a long-term gain, different tax rates apply. For instance, if you sell shares of a foreign stock and the holding period is one year or less, then you would be taxed at the higher, ordinary income tax rates. For tax year 2021, the top federal tax bracket is 37 percent. Whereas if you held the shares for longer than one year before selling them, then the more favorable capital gains tax rates would apply. For tax year 2021, the top capital gains tax rate is 20 percent.

When figuring out the gain on the sale of shares, you may have received a statement showing the gain, but, if you have not, then you would figure out the gain by taking the sales price, and then subtracting the cost basis from that. Your cost basis of the shares is generally the price you paid for them. However, please note that if you sell shares of foreign companies on foreign stock markets, you are not likely to receive a 1099-B consolidated form reporting the sale of the shares. Therefore, it may not be as straightforward as if you were trading on the U.S. stock market. 

Additionally, as we discussed in the article on foreign dividends, if you end up paying tax in a foreign country on the sales of the shares, you will be able to take a foreign tax credit on your U.S. tax return so that you are not double-taxed.

Of course, all of this is assuming that we are discussing shares of individual foreign companies, and not foreign mutual funds. This is because the tax treatment and reporting requirements around foreign mutual funds are different from that of shares of individual foreign companies. What’s more, having an ownership in a foreign corporation over a certain threshold may trigger additional (and different) reporting requirements in the U.S.; namely, Form 5471 and its numerous, Hydra-like schedules.  

If you have an ownership in foreign shares and have sold some shares or are planning on selling some shares in the future, please get in touch today to ensure that you are reporting the gains properly, not to mention that you are receiving the tax credit that you should for taxes paid overseas on gains on the sale of foreign shares. As mentioned previously, many taxpayers have an ownership in foreign companies but either do not report the ownership properly, or sometimes, do not report it at all. There can be tremendous penalties levied for failure to report an ownership in foreign companies, and foreign mutual funds, not to mention the penalties stemming from underreporting income on one’s U.S. tax return.