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As is well known, if you are a US citizen but don't live (or even never have lived) in the US, investing is complicated. Most investment capital gains are taxed in both countries. Even worse, if you invest in a mutual fund where you live, the US taxes unrealized capital gains (even if you don't sell). So for example a US citizen living in Australia, who invests in an Australian mutual fund that goes up 20% must pay US taxes immediately on that unrealized 20% gain even though they haven't sold it. The person may even have to sell the investment to pay the US tax, triggering Australian taxes.

The question is are there any investments that can escape this unrealized capital gains tax? I believe if you buy a house that you live in, this would be an example, but is there any other asset US citizens can hold overseas without paying taxes on unrealized gains? What about precious metals or other physical assets?

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    I would think, a good resource for this, is your brokerage provider. Places like Fidelity, Schwab, or Vanguard might be a good first resource. While I make it a point to learn about these things, I have never heard about paying taxes on unrealized gains.
    – Pete B.
    Commented Feb 22 at 13:48
  • Tax treaties between the US and the foreign country of residence may allow for mutual funds to be held without penalty under a recognized tax-deferred account, depending on the tax treaty between countries. Not sure exactly if this applies to Australia, but it is something to consider. Shares held directly also would not be considered PFICS. Commented Feb 22 at 14:05
  • @Grade'Eh'Bacon of course shares held directly could be considered PFICs. After all, mutual fund shares are being held directly.
    – littleadv
    Commented Feb 22 at 18:23
  • @littleadv *Shares in single companies, rather than funds/etfs, etc. Commented Feb 22 at 19:22
  • Shares in single companies can still be PFICs. PFIC determination is per share per shareholder, even different lots in the same company may end up being treated differently.
    – littleadv
    Commented Feb 22 at 19:26

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The MTM taxation under Sec. 1291 on unrealized gains you're describing is specifically for PFICs.

Publication 8621 defines PFICs here.

So... don't hold PFICs. That means that yes, you'll probably want to avoid non-US mutual funds, ETFs, shares in holding companies or companies with significant passive income.

You would probably want to talk to a licensed tax adviser familiar with the US-Australian tax treaty and the Australian investment instruments to explain to you how they're taxed on the American side. Look for US expat tax advisers in Australia, I'm sure there are plenty.

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