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I am an Australian citizen who has lived in the United States for over 10 years on work visas, filing with the IRS and paying taxes. During that time I purchased shares in a US company, and those shares have seen significant gains. I have not sold any, so I have not yet paid any capital gains tax on them. I recently left the US to relocate permanently to Australia, becoming a US non-resident and an AU resident.

For illustrative purposes, lets say I purchased $100,000 of shares and that they were worth $1,000,000 the day I arrived in Australia.

If I understand correctly, if I now sell those shares:

  1. I do not have to pay capital gains tax in the US, because I am no longer a US-resident,
  2. I do not have to pay Expatriation Tax in the US, because I am not a US citizen, and I never had permanent residency status, and
  3. I do have to pay capital gains tax in Australia, but only on the gains from the day that I arrived, due to "deemed acquisition".

In other words, if I sold them for $1,000,001, I would only pay capital gains on the $1 gain after deemed acquisition, and I do not have to pay anyone capital gains tax on the $900,000 of gains that occurred before deemed acquisition.

Is this correct?

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    TANSTAAFL. You might have to pay Expatriatrion Tax. irs.gov/individuals/international-taxpayers/expatriation-tax
    – Richard at NorgateData
    Oct 1, 2021 at 4:50
  • I didn't realize the expatriation tax could apply to permanent residents as well as citizens. Thankfully, as I was on work visas the whole time (O-1 & H-1B) and never got a green card, the expatriation tax doesn't apply to me.
    – hypercrumpet
    Oct 2, 2021 at 6:40
  • If you are holding the shares in a US brokerage, then when you sell them after arrival in Australia, are you sure that you will not have to pay US income tax on the money? Or will you have transferred the shares to an Australian brokerage as part of your move from the US to Australia?
    – Dilip Sarwate
    Oct 2, 2021 at 19:20
  • @DilipSarwate They are an asset, purchased with post-income tax money, so the proceeds are not income (right?). And in any case, non-US-citizen and non-US-resident means no income tax, right? I'm not planning to shift them to an Australian brokerage unless there's any reason to?
    – hypercrumpet
    Oct 3, 2021 at 3:34
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    I wish you all the best in your dealings with the IRS and the equivalent entity in Australia.
    – Dilip Sarwate
    Oct 4, 2021 at 2:42

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+100

This is not the authoritative answer with references that Grade'Eh' Bacon desires and I don't expect any bounty for it. There are a lot of gray areas in this matter....

The OP was a long-term resident of the US, but not a green-card holder, and has recently returned to Australia which is his country of citizenship. He believes that he is exempt from paying US capital gains tax on sales of stock held in the US after his return to Australia on the grounds of not having any connection with the US anymore. However, the governing regulation seems to be IRC Section 7701(b) which says that he was nonetheless a resident alien during that time. Under IRC section 7701(b), a resident alien is either 1) a lawful permanent resident (i.e., a green card holder) or 2) an individual who is “substantially present” in the United States, and the OP certainly qualified as a resident alien under 2). Furthermore, since the OP moved back to Australia some time during 2021, the IRS deems him to be a tax resident of the US for all of 2021. The OP ceases to be a tax resident of the US when he (i) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, (ii) does not waive the benefits of the treaty applicable to residents of the foreign country, and (iii) notifies the IRS of such treatment on Forms 8833 and 8854. Now, I don't know anything about the tax treaty (if any) between Australia and the US, but most tax treaties say something like each country will tax the income generated within its jurisdiction only, and if one country (usually this means the US) taxes income generated in the other country, then it will give credit against the income taxes due to itnfor taxes paid to the other country. This avoids double taxation of income and effectively means that the _total_tax due from the taxpayer is the larger of the taxes charged by the two countries. So, assuming that the OP follows items (i)-(iii) above, then if and when the OP realizes the capital gains of $900,001$ in the US, he will owe income tax to the US on that amount (presumably a long-term capital gain) less the capital gains tax on $1 that he will pay to Australia.

What if the OP chooses to waive the benefits of the US-Australia tax treaty (or there is no US-Australia tax treaty at all)? Then, I believe that IRC 877A applies. This imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed to have been sold for its fair market value on the day before the expatriation date. Any gain arising from the deemed sale is taken into account for the tax year of the deemed sale notwithstanding any other provisions of the Code. Any loss from the deemed sale is taken into account for the tax year of the deemed sale to the extent otherwise provided in the Code, except that the wash sale rules of IRC 1091 do not apply._ So it appears that the OP will not owe any capital gains tax to Australia except for the increase in value from his deemed acquisition as of the date that he landed in Australia, but he does have to pay US capital gains tax on the deemed sale of his shares in the US without actually selling the shares. Moral: the OP should sell enough shares before year-end so that he will have enough money to pay the capital gains tax owed to the US. Actually, he probably needs to file Estimated Tax returns (Form 1040-ES) if his unrealized gains really are $900K.

What you gain on the swings, you lose on the roundabouts.....

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  • Interesting to note that it seems Expatriation tax only applies to individuals above a certain income /wealth threshold IRC 877(a)(2): " (2)Individuals subject to this section This section shall apply to any individual if— (A)the average annual net income tax (as defined in section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000, (B)the net worth of the individual as of such date is $2,000,000 or more, or (C)[the individual failed to fulfill tax obligations in the prior 5 years]"
    – Grade 'Eh' Bacon
    Oct 8, 2021 at 13:02
  • However apart from that point, I think this answer guides what I had missed, being less familiar with the US system: the IRS incorrectly guides that a lawful permanent resident for these purposes is purely a greencard holder with literal 'permanent' rights to reside in the US, when in actuality it seems there is a deeming provision that applies to all residents for tax purposes, including those who merely meet the substantial presence test (see section 'c' here) "law.cornell.edu/cfr/text/26/301.7701(b)-1"
    – Grade 'Eh' Bacon
    Oct 8, 2021 at 13:09
  • @Grade'Eh'Bacon When I was a F-1 (nonimmigrant student) visa holder over 50 years ago, if I had wanted to go home for the summer (not that I could have afforded it), I would have had to present to the airline check-in desk a certificate from the IRS that I had paid (actually had had withheld) the taxes due on my assistantship stipend, and I would have been directed to the INS (Immigration and Naturalization Service) office to submit the certificate and get their stamp on my boarding card before going to the boarding gate. Yes, the US takes taxes seriously.
    – Dilip Sarwate
    Oct 9, 2021 at 20:54
  • Beg to differ. The substantial presence test in 7701(b)(3) (modified by (b)(5)) and related regs is part of the definition of 'resident alien' in (b)(1) but NOT of the definition of 'lawful permanent resident' in (b)(6). An LPR is automatically an RA but an RA is not automatically an LPR, and it is (b)(6) LPR NOT (b)(1) RA that is referenced by 877A and its predecessor 877. The departure aka 'sailing' rules are 26CFR1.6851-2 (based on general authority in 26USC6851) and apply to both resident aliens (including LPR) and nonresident aliens (per 7701) physically present, but not citizens.
    – dave_thompson_085
    Oct 10, 2021 at 4:23

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