In limited circumstances, U.S. tax attributes are affected by the actions of foreign persons with no immediate physical presence in the United States. Consider the following examples; the offshore sale of an asset by a foreign person will establish a stepped up basis to fair market value for U.S. tax purposes. Property received by offshore inheritance is also stepped up to fair market value for U.S. tax purposes. Where a foreign national with appreciated assets, moves to the United States, they can be caught off guard when they learn that capital gains that were earned entirely offshore will nevertheless become subject to U.S. capital gains tax upon a subsequent sale after becoming a U.S. tax resident.
This tax trap may not occur to a recent U.S. immigrant because most offshore tax regimes allow for a step up to fair market value upon immigrating into the foreign jurisdiction. U.S. tax advisor should be on the lookout for foreign businesses that seek to unwisely contribute appreciated offshore business assets into a U.S. corporate structure under the non-recognition provisions of IRC section 351. This action will bring any capital gains earned offshore into the U.S. tax system. The offshore appreciated assets can potentially face double taxation, once at the corporate level and one at the individual level, upon a subsequent sale where a U.S. C Corporation is utilized. This tax trap can be avoided by deliberately failing to comply with the non-recognition requirements of IRC section 351 or by selling the appreciated assets offshore and capitalizing the corporation with cash. Alternatively assets can be transferred to the corporation in exchange for corporate debt in a manner that triggers the recognition of gain under IRC section 351.
Being a U.S. citizen, or holding a green card exposes an individual to U.S. worldwide taxation regardless of any other foreign citizenship. Dual nationals are subject to U.S. worldwide taxation even if they are wholly unaware of their U.S. citizenship.