I am moving to the U.S on a H1B visa. I have a portfolio of accumulating ETFs domiciled in Ireland. What will be the tax implications of this in the U.S if I plan to rebalance this portfolio every year?
1 Answer
TL DR: If you are subject to US tax, you should instead consider converting your assets to US based assets to avoid complex and unfavorable tax treatment of your investments.
Most ETFs held outside the US are considered PFICs (Passive Foreign Investment Companies) and are given unfavorable tax treatment. This article gives a bit of a summary: https://mazarsledger.com/article/the-complex-universe-of-passive-foreign-investment-companies/
Tax treatment of PFICs is very complex and I am not an expert.
If you choose to hold the ETFs and opt for the mark-to-market option, you unrealized gains for the calendar year will be treated as ordinary income. That is, they will be taxed on the appropriate marginal tax bracket like your earned income, which could be up to 37% in 2018 (vs 15% for most long term capital gains). This essentially makes you treat the unrealized gains from a tax year like short term capital gains.
The same applies when you sell shares during rebalancing if you are eligible to use mark-to-market. You calculate the gain since the previous tax period and treat it as ordinary income.
Losses are also treated specially, but I won't try to explain that here.
Unfortunately, it seems that if you buy and sell within a single year, you don't get to use mark-to-market, and the whole sale price may be treated as ordinary income.
You will almost certainly be better off converting the assets to US based ETFs while you are subject to US taxation. If these ETFs are held in some sort of retirement or pension scheme, you may want to get professional advice on whether they are PFICs or not and if tax treaties offer you any advantages.
