French taxes and U.S. Capital Gains Income

Amidst all the brambles of U.S. and French tax law, this issue seems to be particularly prickly. As an American citizen resident in France, how are your capital gains taxed?

Which Capital Gains?

First let’s look at what sort of capital gains we are talking about. Capital gain (le plus-value or le gain en capitalin French) is defined rougly as the amount of value you get from selling an asset minus the amount you spent to acquire that asset. In other words, the profit on the sale of an asset. Often, we come across capital gain when we sell a piece of property, including a family home. In both France and the U.S. there are specific rules and exemptions around the taxes due on capital gain when you sell real estate. There are also distinct rules in both countries that relate to selling a business. And as both of these sorts of capital gain are addressed separately in the French-American Tax Treaty, we are not talking about either one in this article. Instead, we are looking at the capital gains (or losses) that might arise if you sell shares of something in your investment portfolio.

How does Capital Gains tax work in the U.S.?

Let’s say you have some sort of investments in the U.S. These could be some company stocks you received in the past from your employer. They could be the cryptocurrencies or NFT’s your grandmother gave you after reading an article in the news. Or they could be mutual funds or tech stocks you bought yourself in an investment account you opened to build up your savings. In any of these cases, the market value of your investment will go up and down over time. But you won’t worry about taxes on that gain until you actually sell the asset.

After the close of every year, the brokerage houses and banks that hold people’s investments send out a 1099 report indicating any investments that you sold during the year (as well as dividends paid) and the amount of any capital loss or gain from the sale. This report, in turn, allows you to correctly fill out your U.S. tax return. If you owned the shares in question for less than a year, you will pay capital gains tax based on your regular income tax rate. But if you owned the shares for at least a year (long-term gains), the U.S. government will tax your gain at a reduced rate of 0%, 15%  20%, depending on your income. 

What if you are a tax resident of France?

Under normal circumstances, countries that have tax treaties agree that capital gains from moveable property – like stock shares—will be taxed by the country where the taxpayer is resident, i.e. France. And that is how the French-American treaty starts out. Article 13 “Capital Gains” describes the taxation of gains on real estate, business and shipping business before ending, somewhat weakly, with “Subject to the provisions of paragraph 5, gains from the alienation of any property other than property referred to in paragraphs 1 through 4 shall be taxable only in the Contracting State of which the alienator is a resident.” And if you are something other than a U.S. citizen in France, that is likely the extent of it. But the U.S. negotiated one more crucial twist on the subject.

Article 24 of the Treaty describes exactly how the two countries will make the credits/exemptions work to prevent double taxation. And in section 1(b)(i) of that article, the U.S. sneaks in a special provision for capital gains and dividends that paid out 1. In the U.S., 2. to a U.S. citizen resident in France, 3. by: a U.S. government branch (i.e. governmnt bond dividends);  a U.S. company whose shares are traded on a recognized stock exchange; other U.S.-based companies (provided that less than 10% of their ownership belongs to the taxpayer in question); and “profits or gains derived from transactions on a public United States options or futures market.” There are actually a few more exceptions included in this section. But for our purposes, the result is that the French government is going to give you a full credit for any taxes you would have owed in France on this sort of income. 

So how do I report my capital gains for the year?

You are going to report your gains in the U.S., as usual. You can use any long-term capital losses to offset gains. And of course, you will use U.S. provisions like the Foreign tax credit to lower your overall U.S. tax bill. 

In France you report your gains on Form 2047 section 2 and Form 2042 section 2. You will see that Form 2047 lets you choose between two forms of tax credit. For the capital gains and dividends from your U.S. stocks, you are looking for “revenus ouvrant droit à un crédit d’impôt égal à l’impôt français” or “income entitling [the taxpayer] to a credit equal to the French tax.”

The French tax authorities will apply a credit for French taxes on these items. You can find a little more detail on the French application special U.S. tax treaty provisions at the end of the Notice (guide) for Form 2047, in the section dedicated to the États-Unis.

Coucou! While you have your U.S. investment accounts up on the computer screen, remember to add these to your French form 3916, reporting of foreign accounts. Then head back over to the IRS to add your French accounts to the FATCA or FBAR form (whichever apply to you) to keep both governments happy and up to date on your accounts.

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