How to realize capital gains before going from non-resident alien to resident alien in USA

Question

I am a foreigner and will move to USA next year (2016) and want to optimize my tax situation beforehand. I bought stocks in 2009 which appreciated in value but I would still like to keep them.

So my plan is to sell those stocks right now and buy them back 5 minutes later. That way, I am realizing current capital gains and only pay tax in my current country (but not in US) and if I would be selling the stocks in 2016 I would only need to pay capital gains on the appreciation between now and time of sale 2016.

1) Is this possible and will it have the intended effect? 2) Is my plan not very similar to http://en.wikipedia.org/wiki/Wash_sale, i.e. I would need to wait 30 days before re-purchasing the stocks?

Answer 1

Is this possible and will it have the intended effect?

From the US tax perspective, it most definitely is and will.

Is my plan not very similar to Wash Sale?

Yes, except that wash sale rules apply for losses, not gains. In any case, since you're not a US tax resident, the US wash sale rules won't apply to you.

Answer 2

This will work as intended, but there's another point to consider. In the US, the tax rate on proceeds from stock sales is higher for short term holdings, which are defined as held for less than one year. Both rates vary based on your income.

• Short term: whatever your normal income tax rate is (10% - 36.9%)
• Long term: varies by standard income tax bracket
  • 0% if income falls in the bottom two brackets (adjusted gross income <= 36900)
  • 15% if you're in the middle brackets
  • 20% if you're in the top bracket (AGI >= 406751)

Bracket numbers are for fiscal year 2014, filing as single.

The difference between short and long term capital gains tax in the US is a minimum of ten percentage points, and works out to 15 percentage points on average. This is substantial.

If you won't be reporting much income the year you move to the US (say because you only worked for a portion of the year) it is decidedly to your advantage to wait and sell the stocks in the US, to get that sweet 0% rate. At a minimum, you should hold the position for a year if you sell and rebuy, from a tax optimization perspective.

Two caveats:

• I don't know how this will interact with your home country's taxation.
• There are a couple exceptions to the long term rate, involving higher rates, for certain types of capital gains. Sale of stocks of section 1202 small businesses is one of them.