Selling Foreign Assets After Moving to the US: The Cost Basis Mistake That Can Trigger Unexpected Capital Gains Tax

Capital Gains On Pre-Arrival Assets

Most expats who moved to the United States years ago assumed the cost basis of their pre-arrival assets was whatever they paid for them. In many cases, that assumption is about to cost them.

This article explains how the US taxes capital gains on assets that a taxpayer owned before becoming a US tax resident: why there is no automatic step-up on arrival, how the currency translation rule works, the documentation problem that catches long-tenure expats off guard, and where the PFIC regime quietly changes the calculation. Itis aimed at foreign nationals and dual citizens now preparing to sell a pre-arrival property, equity holding, or employer stock.

Why the US Does Not Give You a Step-up When You Move Here

The starting point in US tax law is that a taxpayer's cost basis in an asset is what they paid for it, the original acquisition cost, expressed in US dollars at the exchange rate prevailing on the acquisition date. Moving to the United States, filing a first 1040, and becoming a US tax resident does not reset that basis. The asset carries the same cost basis for US purposes that it had on the day it was bought, even if the buyer was not a US person at the time.

This is counter-intuitive for many expats, particularly those from jurisdictions that do provide a step-up on the date someone becomes resident. France, for example, applies a form of market-value basis in some circumstances. Switzerland imposes no capital gains tax on private individuals on most securities gains. Readers from those background soften assume the US works the same way on arrival. It does not.

There are limited exceptions. Assets that pass by inheritance may be eligible for a step-up under the US rules on inherited property, and treaty provisions occasionally re-characterize the inherited basis for cross-border estates. Some gift scenarios, notably between spouses with different nationalities, have their own basis rules. These exceptions are important when they apply, but they are not a general step-up on immigration.

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How the Currency Translation Rule Creates Phantom Gains

The second point that surprises new US taxpayers is how currency is handled. US tax is calculated in US dollars. The cost basis of a pre-arrival asset is translated into USD at the exchange rate on the day of purchase. The sale proceeds are translated into USD at the exchange rate on the day of sale. The gain, the taxable figure, is the difference between those two dollar amounts.

In plain English: exchange-rate movement between purchase and sale is part of the US gain. A UK flat bought in 2011 for£350,000 when the pound was worth about $1.60 has a US cost basis of roughly$560,000. Sold in 2026 for £500,000 when the pound is worth about $1.25, the proceeds are roughly $625,000. The US gain is about $65,000, even though the sterling gain is £150,000. Had sterling held at its 2011 level, the US gain would have been roughly $240,000. The currency did a lot of the work.

The same mechanic can work in reverse. An expat whose home currency has strengthened against the dollar since they bought the asset can find a local-currency loss converted into a US-dollar gain. This is sometimes called a "phantom gain," and it is not a defect in the calculation, it is simply a consequence of US tax being measured in dollars.

The Documentation Problem: What Happens When Records Are Missing

The practical difficulty many long-tenure expats face is not the calculation itself. It is the absence of records. An asset bought twenty years ago in a different country, through a bank that may no longer exist, in a currency whose exchange rate has to be reconstructed for that specific date, can be genuinely hard to substantiate.

The IRS position on unsubstantiated basis is unambiguous: the taxpayer has the burden of proving cost basis, and where it cannot be proven, basis may be treated as zero. A sale with a zero basis means the entire sale proceeds are taxable gain. For a long-held property or equity position, the difference between a proper reconstructed basis and a zero basis can be an enormous tax bill.

What I see most often is that the documentation problem is solvable if it is addressed before the sale. Broker statements, solicitor files, mortgage records, company registries, employer records for stock plans, and contemporaneous valuations can all contribute to a defensible basis. After the sale, with the gain crystallized and the return due, the same reconstruction is harder to do quickly and on the record.

How This Plays Out Across Common Asset Types

A few asset types come up repeatedly in this context. A UK residential property, typically a London or Dublin flat kept on after the move, is usually the largest single exposure. Basis is the original purchase price in USD, capital improvements over the years increase it, and selling costs and allowable legal fees reduce the gain. The principal residence exclusion under US rules has its own tests and rarely applies cleanly to a flat kept for rental after arrival.

Pre-arrival employer stock, common among transferees, is the second category. The US cost basis depends on whether the shares were RSUs, options, or direct purchases, and on whether taxable events in the home country changed the US-side basis. A stock plan that was straight forward in the home country can become surprisingly technical on a US return years later.

European equities held in a general investment account, not a pension wrapper, are the third category. Individual share positions follow standard capital-gain mechanics. Pooled investments(UCITS ETFs, unit trusts, European fund structures) are a different matter, because the PFIC regime applies. The PFIC rules override the normal gain calculation and tax the deemed distribution at higher rates with an interest charge. Middle East real estate, often held through a local title arrangement or free-zone company, raises its own US basis and entity-classification questions.

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Pre-sale Planning: What Is Actually Possible Before the Sale

Pre-sale planning, done early, tends to be where the real value lies. Three moves come up most often.

First, record reconstruction: identifying, retrieving and organizing the documents that substantiate the original purchase cost, capital improvements, and the contemporaneous exchange rate. This is slower than it sounds for assets held through multiple banks or intermediaries over many years.

Second, valuation evidence for the limited cases where a step-up can apply, inheritance, certain gift scenarios, so that if the facts do support a higher basis, the evidence is in place rather than being reconstructed in the middle of a sale.

Third, timing and sequencing: the US tax year runs January to December, and the Foreign Tax Credit on home-country taxpaid on the same gain is only useful within the limits of its category. The interaction between the date of sale, the home-country tax assessment, and the US return affects whether the credit actually absorbs the foreign tax or carries.

The FX Mechanic Illustrated: a Pre-arrival UK Flat

Illustrative example, a pre-arrival UK residential property. All figures are for illustration of the currency mechanic only and are not a projection, a recommendation, or a prediction of any specific exchange rate or market outcome.

Source: Skybound 2026

Questions To Raise With A Qualified Adviser

For an expat in the US preparing to sell a pre-arrival asset, a short list of questions to raise with a qualified cross-border tax preparer includes:

• What is my original USD cost basis, translated at the exchange rate on the purchase date?
• What documentation do I have to substantiate that basis, and what is missing?
• Does any limited exception, inheritance, certain gifts, treaty provision, apply to my facts?
• If the asset is a pooled foreign fund, does the PFIC regime displace the normal capital-gain calculation?
• Will any home-country tax on the same gain generate a usable US Foreign Tax Credit in the right category?
• Is there a timing or sequencing move, across US tax years or home-country filings, that affects the overall tax outcome?
• For US-situs real estate or employer stock, are there state-level rules layered on top of federal?

The absence of a step-up on arrival is one of the quieter surprises in the US tax code for expats. The combination of that rule, the currency translation mechanic, and the burden-of-proof on basis means that pre-sale planning, done early, with records, is usually where the difference between a manageable bill and an avoidable one is made.