Receipt Foreign Gift or Foreign Inheritance (Form 3520)
I’ve discussed in separate articles and video the Form 3520 filing requirements when you receive one or more foreign gifts or foreign inheritances in a calendar year that exceed $100,000 in total.1 In short, you need to timely file Form 3520 or face a horrendous penalty (generally 25% of the gift amount).2
Assuming you timely filed an accurate Form 3520, reporting all your foreign gifts and foreign inheritances received during the calendar year, there are several lurking tax traps:
1) First, if you receive, as a foreign gift or foreign inheritance, assets or property, such as cash, stock, securities, cybercurrency or real estate (collectively “property”), when you later sell that property, you will have a reportable and potentially taxable transaction under U.S. tax law, even though the property is located in a foreign country. Your gain or loss is measured by the property’s basis in the foreign person’s hands at the time the transfer was made (you “step into the shoes” of the transferor). If you cannot establish the basis, then IRS will treat the basis as zero and you’ll owe taxes on the entire gain.
For example, if your foreign uncle bought cryptocurrency for $1,000 and gifts it to you when it is worth $150,000, your basis is $1,000, the same as your uncle’s. If you immediately sold the cryptocurrency for $150,000, your taxable gain is $149,000.
Note: If you receive a foreign inheritance, the basis is stepped up to fair market value at the time of the donor’s death. In the previous example, if your uncle died and you inherited the cryptocurrency, your basis would be stepped up to $150,000 and a later sale for that amount would produce no gain. The lesson: It is much better to receive appreciated property through a foreign inheritance rather than as a foreign gift.
2) Another trap: If you receive a foreign gift or foreign inheritance, that property will be considered part of your U.S. estate for estate-tax purposes, whether or not you have the ability to transfer the asset to the U.S. For instance, if you receive $25 million of stock in a Chinese company as a foreign gift or foreign inheritance, currently China allows only $50,000 a year to leave its country. Despite this restriction, the U.S. will consider the stock as part of your estate. You may be able to establish a lower valuation (a discount) because you do not have full access to the property, but the property will still be part of your estate and in some circumstances, you could owe U.S. estate taxes on property that you cannot liquidate to pay the taxes. Note: there are other countries that have limits on transfers out of the country so be extremely careful when receiving foreign gifts or foreign inheritances of property, since you could wind up with an estate tax issue, even though you cannot liquidate the foreign property to pay the tax.
- Form 3520 is required for foreign gifts or foreign inheritances of $18,567 for 2023 (adjusted annually for inflation) received from a foreign entity, such as a corporation, partnership, LLC or trust.
- The penalty is 5% per month to a maximum of 25%. Note: If you file the return late, the receipt date is the date IRS receives the form, not the mailing date.