Need advice on moving investments from Europe to the US without triggering short term capital gains taxes.

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fc_pty
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Joined: Thu Sep 28, 2017 3:08 pm

Need advice on moving investments from Europe to the US without triggering short term capital gains taxes.

Post by fc_pty »

recently got married to a European citizen who has money invested in Europe. Most of it is VWRA held in an Interactive Broker's account. The problem is that my wife will now be considered a US tax resident and holding foreign investments would expose her to the hassles of ownership of a Passive Foreign Investment Company (PFIC), which is both expensive (tax wise) and annoying (complicated paperwork that usually requires hiring someone to properly report).

This leaves us three potential choices:

1. Sell - and trigger short term capital gains taxes

2. Hold and eat the costs/annoyance

3. Do an in kind transfer that is sufficiently similar that it is "in kind" but held by a US broker in order to avoid PFIC issues. I'm a little (very) fuzzy on if this is even possible.

We would really like to avoid dealing with PFIC paperwork/costs, but if we sell, it will likely trigger short term capital gains taxes for a large chunk of the money, as she only started investing last year. Any thoughts as to how to avoid that?

Additional info: we're roughly talking about a total of 120k. About 100k invested and 20k in growth. She has been investing every 1-2 months for about 1.5 years. How would this affect short term capital gains taxes? I know there is some accounting method about first in/first out but I am unclear as to how this actually works and if it is even an option.

Thank you all for your help!
TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Need advice on moving investments from Europe to the US without triggering short term capital gains taxes.

Post by TedSwippet »

fc_pty wrote: Thu Jul 22, 2021 12:05 pm recently got married to a European citizen who has money invested in Europe. Most of it is VWRA held in an Interactive Broker's account. The problem is that my wife will now be considered a US tax resident and holding foreign investments would expose her to the hassles of ownership of a Passive Foreign Investment Company (PFIC), ...
A bit more information required, I think.

How is it that your wife is considered a US tax resident post-marriage, but not before? If she's already resident in the US before marrying you, she's probably already also a US resident for tax purposes (the main exceptions being J and F visa status). In which case, she's under the PFIC rules.

Or, if not yet an actual US resident, does she plan to move to the US soon? Or, has she just arrived and so might fail the substantial presence or green card tests? Or, are you planning to file your US tax as Married Filing Jointly, which would rope her into the entire US tax morass, including PFIC, anyway?

There could be some planning around these, although in general the ideal is to rid oneself of PFICs before becoming shackled to the byzantine and foreigner-hostile US tax system. A bit more in this wiki page:

US tax pitfalls for a non-US person moving to the US - Bogleheads

Finally, my understanding of the PFIC tax quicksand is that it overrides the usual short/long term capital gains rules anyway, so in that sense if your wife is already a US person and holds VWRA then it may be too late to do much beyond minimising future long-term tax damage.

If that's right, then if there is any good news here, it is that PFIC mark-to-market over the very short term can be more or less equivalent to normal US short-term capital gains tax. It's over the longer term that things turn truly nasty -- either the lack of any long-term lower rate and annual tax on unrealised gains with mark-to-market, or the appalling excessive tax rate plus interest of the default Section 1291 treatment. VWRA is not a PFIC 'Qualified Electing Fund'.

As for "in kind" exchanges, pretty much a non-option I think. Sale of VWRA and then re-purchase of an equivalent US domiciled ETF is going to be the only way I can see out of PFIC's dark abyss.
Last edited by TedSwippet on Thu Jul 22, 2021 3:51 pm, edited 4 times in total.
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LadyGeek
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Re: Need advice on moving investments from Europe to the US without triggering short term capital gains taxes.

Post by LadyGeek »

fc_pty - You've posted this same question in the personal investments forum, which I've removed. There were no replies.

It's best to keep all of the information in one discussion and the Non-US investing forum will attract the members who can help you the best.
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