H1B visa: Do I have to pay taxes on equity encashed from a company based abroad?

[roalddahl14]

Hello,

I am an Indian citizen and have been working as a Research Scientist on an H1B (lottery exempt) visa at a US university since November 2023. Prior to this, I was on a J-1 visa (Research Scholar) at a national lab in the US starting in 2018.

Before moving to the US, I was a consultant at a startup in Singapore and was awarded equity in the company. The equity vested over three years, and I am now eligible to cash it out. I would like to transfer the proceeds to my US bank account.

Since Singapore does not tax capital gains, I do not owe any taxes on this equity there.

I would like to know if I need to pay taxes on this equity in the US. If so, how should I report it to the IRS? Additionally, is receiving such income legal given my current H1B visa status? I am expecting to receive permanent residency in the US later this year. Should I wait to receive my green card before transferring the equity money from Singapore to my US bank account?

Regards,
RD

[roalddahl14]

It is not a duplicate question. This question is about capital gains. The other question is about royalties.

[pk]

@roalddahl14  what I gather  from your post is that :

(a) you are a Resident Alien for tax purposes  --- you file your return on form 1040 ( supported by TurboTax ) and are taxed on your world income

(b) You have RSU ( or similar  restricted  stock grants ) from a foreign entity *( based in Singapore ). These are  now restriction free (vested ).    Assuming that  you have not recognized  these stocks  ( either in Singapore , India  or in US ), your basis  is this is probably  zero  -- unless  your employer at the time  showed  then FMV as income  and was already taxed.   Need details on this .

(c) Because you are Resident for Tax purposes and taxed on world income,  when you dispose of these shares/ equity your gain  is taxable income to the US.  It is immaterial  whether you are a Resident for Tax purposes  or  Immigrant ( GreenCard ) or citizen, you are still taxed on world income.

Hope this helps -- for more specific answer , please provide more details of the equity grant, basis,  any taxes  paid etc. etc.

I await your response 

pk

[roalddahl14]

Hello,

Thank you for your response. It is very helpful.  I was given the equity in 2018 before I moved to the US. The equity was vested in 2021. I did not encash it then because I did not receive any documentation from the company about the value of the equity at that time. I was also not aware if I needed to pay taxes once the equity was vested. I asked the company and they said this is an "incentive option".

What kind of documentation I would need from the Singapore-based company for taxation purposes? Do I have to pay taxes since 2021?

[pk]

@roalddahl14  you say " incentive option" -- does this mean  a warrant / promise  from the entity  to let you buy  XXX shares at  US$ YYY each  ( irrespective of market value ) or actual shares   handed over to you  with conditions ( Restricted ) as a payment / bonus in kind ?

If the latter, then  from US tax perspective , since these were owned  by you  when you entered US, your basis  would be at whatever you got it at  ( generally at  FMV on the award date  -- because the awarding entity would put it on their books as an expense  at FMV ).   Any gain or loss  will have to be recognized  for US taxes when you dispose  the shares.

Does this make sense ?

[roalddahl14]

Hello,

Thank you for your response. It is the former case, i.e., a warrant / promise from the company that let me buy  shares at a given price irrespective of market value. So, do I have to pay taxes because of vesting? What kind of documentation would I need from the Singapore-based company for taxation purposes?

[pk]

@roalddahl14 , an exercise of the warrant ( i.e. paying monies  to acquire the shares ) does not in itself become a taxable event -- it only sets the basis  ( out-of-pocket cost ) for the shares acquired.  When you dispose off the shares  ( i.e. en-cash )  then you have taxable income -- ca[pital gain if you have held the shares for more than 365 days ( one year )..  And of course if you are still a resident of this country then  you pay taxes to the IRS  ( under its rules  ). 

Does this make sense ?

[roalddahl14]

Dear pk,

Thank you. That's very helpful. I plan to dispose off the shares ("encash") this year. Your email says "capital gain if you have held the shares for more than 365 days". I had the equity awarded to me in 2018 and its first installment was vested in 2019, with 100% vesting in 2021. So, I guess I would have to pay long-term capital gain tax. Is that correct?

What kind of documentation would I need from the Singapore-based company for taxation purposes? The company will do a wire transfer to my US bank account from Singapore.

[pk]

@roalddahl14 , I just want to be sure that we are on the same page ---- You have to be in possession of the shares/equity for ONE year to be bale to take advantage of the Capital; gain tax -- not just the promissory note and /or vesting ( implying no restriction to dispose off the shares ).   If that is true, then yes selling these  in  2024 will attract capital gains tax when you file  your  return in 2025   If it is large sum then I would suggest  that  you pay-in  some estimated tax in the quarter that you sell these equities.  ( both for the federal and for the state ).

Hope this makes sense.

The paperwork you need for your records  -- when did you buy the shares , at what total price, any commissions etc. and ditto for the sales side of the equation.  Because  this is foreign  shares ( i.e. not listed in the USA) , you should get all these records from a broker in Singapore ( or from whom ever  does these transactions for you ).   IRS will not ask for these unless in an audit ( but you should be prepared. ).  Also keep notes on exchange rates on the days of the transaction(s).

Is there more I can do for you ?  

If you are  satisfied  with my answers please accept and/or upvote the answers.

Namaste ji

pk

[roalddahl14]

Dear pk,

Thanks a lot! About your following comment:

---

You have to be in possession of the shares/equity for ONE year to be bale to take advantage of the Capital; gain tax -- not just the promissory note and /or vesting ( implying no restriction to dispose off the shares ).   If that is true, then yes selling these  in  2024 will attract capital gains tax when you file  your  return in 2025 

I am still not in possession of the shares. As I mentioned earlier, it was an option offered to me but I am yet to exercise it. I intended to receive shares next month and then do the sale within the same month. In that case, what kind of tax I will be subjected to? Would it be short-term capital gain?

P.S. Of course, I have upvoted all your answers 🙂 Namaste!

[pk]

Dear @roalddahl14 , that is what I wanted to clear up --- if you just buy and then within a short time ( less than a year )you sell  , it will be short-term gain treated as ordinary income and taxed at your marginal rate  ( i.e. added to your other incomes  and push you to a higher tax bracket ).   If on the other hand, you hold for a year and then sell,  the gain will be taxed at Capital tax rate  (  for most people it is zero or 15% ).

Also note that if you exercise  now and then leave USA and go back to India and then sell --  generally you will pay only Indian tax rate  ( there may be indexing also ) .  If you have stayed here  more than  10 years, then US may want you to mark to market and   want withholding  at the market price gain ( even if you have not sold the stocks ).  But this is of course all in the future.

Thank you 

pk 

[roalddahl14]

Thanks you! If I buy and dispose it off the next day -- which is what I intended to do -- then what kind of capital gain tax will be levied on me? I believe it would be short-term capital gain tax, right?

I was trying to look up if there is any difference in short- and long capital gain tax rates for H1B visa holder on foreign shares. I can find that information for US-based shares. But I am wondering if the tax rates are different for the foreign shares.

[pk]

@roalddahl14 , there is no short-term capital gain -- you just pay ordinary income rate.  Only assets held over one year get Capital  tax rate  ( for most people it is zero or 15% , based on your other income ).

One way to see the impact ( very roughly )  and assuming that you are doing your return on widows downloaded / CD version, is  to  (a) open your filed return and  then save it under a different  name.  This will result in your original return saved with original name and a new one with a new name and usually open.   (b) now go through the  return and  add  a dummy 1099-B ---- using your  warrant price as  "Basis" and the selling / FMV as your sales price --- this will show you what happens if you hold  only for short-term and changing dates to make it long-term.  These  what-ifs will give a better directional figures  while preserving your confidentiality.   Note here that for trying out  long-term / capital gain scenario, you have to show a buying date  of at least one year before  the selling date  ( Turbo will not allow future dates  i.e. past the current date because you are using the 2023  software ).

Hope this helps.

Namaste ji

pk