IRC 865 governs the source of income from sales of personal property -- a question that sits at the intersection of inbound investment structuring, foreign tax credit (FTC) basket planning, transfer pricing, and digital asset taxation for nonresident sellers. Unlike the interest, dividend, and royalty sourcing rules in IRC 861 and 862, which are driven by the location or nature of the income-producing asset, IRC 865 begins with the seller's residency and then layers a series of categorical exceptions that override the default. Getting IRC 865 right is not optional: the source classification controls whether a nonresident's gain is subject to US tax, whether a US resident's gain populates the right FTC basket, and whether withholding applies. Verify all statutory and regulatory citations at IRS.gov before relying on them in any filing or client advice.
This guide is the companion to the IRC 861-862-863 source-of-income rules guide. The frameworks are interrelated: IRC 861-863 govern most income categories, while IRC 865 specifically addresses gain on personal property sales. Practitioners working on cross-border asset dispositions should work both guides in sequence.
IRC 865(a) establishes residency as the baseline rule for sourcing gain on sales of personal property. The rule is binary at its core:
For nonresidents, the default rule is structurally favorable: a foreign individual or entity selling non-US-situs personal property generally has no US-source gain and thus no US tax exposure on that gain. The consequent planning question is whether any of the categorical exceptions in IRC 865(b) through (h) pull the gain back into US-source treatment.
For US residents -- including US citizens abroad, green card holders, and domestic corporations -- the default rule means all personal property gain is US-source unless an exception applies. This matters for FTC planning because US-source gain does not populate the numerator of the IRC 904 FTC limitation fraction; only net foreign-source taxable income does. Misclassifying foreign-source gain as US-source compresses the FTC limitation and wastes creditable foreign taxes. Verify current residency definitions and FTC interaction at IRS.gov.
The residency default in IRC 865(a) has two principal downstream effects. First, for nonresidents: foreign-source personal property gain is generally outside US tax jurisdiction entirely (absent ECI or the US office exception in IRC 865(e)), so no withholding applies under the normal FDAP rules. Second, for US residents: US-source personal property gain is excluded from the foreign-source income numerator of the IRC 904 FTC limitation. A US multinational that incorrectly reports foreign-source gain as US-source will understate its FTC limitation and may fail to credit all of its foreign taxes in the current year. Excess credits carry back one year and forward ten years; verify current carryback and carryforward periods at IRS.gov.
IRC 865(b) is the first major override of the residency default. It provides that inventory property -- property held primarily for sale to customers in the ordinary course of a trade or business -- is sourced differently from other personal property. The inventory exception matters most for manufacturers, distributors, and traders operating across borders.
For inventory that is purchased (rather than manufactured) and then sold, the source of income is generally determined by the destination of the sale -- that is, where the property is sold. Purchased inventory sold within the United States generates US-source income; purchased inventory sold outside the United States generates foreign-source income. The destination test looks to where title passes and where the economic sale occurs in the context of the full transaction. Verify the current destination-of-sale rules and any applicable regulatory guidance at IRS.gov.
For inventory manufactured by the taxpayer, the sourcing rules under Reg. 1.863-3 apply a 50/50 allocation between production activity and sales activity. Fifty percent of the income is sourced based on where the property is manufactured (the production element) and fifty percent is sourced based on where the property is sold (the sales element). This rule requires separate accounting of production costs and sales revenue and applies to income from property manufactured within and sold outside the United States, or manufactured outside and sold within the United States. Verify the current Reg. 1.863-3 rules for manufactured inventory at IRS.gov.
IRC 865(c) carves out depreciable personal property from the pure residency default and replaces it with a bifurcated sourcing analysis. The purpose of the bifurcation rule is to match the source of gain to the jurisdiction that previously received the benefit of the depreciation deductions used to generate that gain.
When a taxpayer sells depreciable personal property, total gain is divided into two components:
This structure means that a nonresident who used equipment or other depreciable property in the United States -- and who deducted depreciation against US income -- cannot later claim foreign-source treatment for the recapture gain on disposition. The US tax benefit of the depreciation is offset by US-source treatment of the recovered gain.
The interaction between IRC 865(c) and IRC 1245 ordinary income recapture requires attention. IRC 1245 treats gain on the sale of depreciable personal property as ordinary income to the extent of prior depreciation deductions. The IRC 865(c) sourcing analysis applies to determine the source of that ordinary income recapture amount: if the underlying property was used in the United States, the IRC 1245 recapture is US-source ordinary income. For a nonresident, US-source ordinary income from business activity may be effectively connected income (ECI) subject to net-basis US tax. Verify current IRC 1245, IRC 865(c), and ECI interaction rules at IRS.gov.
IRC 865(d) provides sourcing rules for gain from the sale of intangible property, including patents, copyrights, trademarks, trade names, franchises, licenses, and goodwill. The rules depart materially from the residency default because intangible value is inherently tied to where the intangible is exploited -- not where the seller resides.
Under IRC 865(d)(1)(A), gain from the sale of an intangible that is contingent on the productivity, use, or disposition of the intangible is sourced in the same manner as a royalty payment. That means the contingent gain is sourced to the location where the intangible is used or applied. If the intangible generates value through use in the United States, the contingent gain is US-source income. This rule prevents the recharacterization of ongoing royalty streams as capital gain by framing an intangible license as a "sale" with contingent payment terms.
The non-contingent (lump-sum) component of proceeds from an intangible sale is sourced under the IRC 865(a) residency default. Transactions that mix fixed and contingent elements require allocation between the two sourcing regimes. Verify current contingent payment rules and allocation methodologies at IRS.gov.
Goodwill that is attributable to a specific place of business -- rather than to a separately identifiable intangible -- is sourced by the location of that business. Goodwill attaching to a US business is US-source; goodwill attaching to a foreign business is foreign-source. In a transaction involving goodwill attributed to operations in multiple jurisdictions, allocation between US-source and foreign-source goodwill is required. Verify current goodwill sourcing rules and the treatment of enterprise goodwill versus location-specific goodwill at IRS.gov.
The IRC 865(d) rules apply to gain from the sale of intangibles generally, including self-created intangibles. However, the interaction between self-created intangibles and the IRC 865(d) contingent payment rule may differ from the treatment of purchased intangibles in certain fact patterns. Verify current self-created intangible sourcing rules at IRS.gov.
In related-party transactions, the sourcing analysis under IRC 865(d) is subordinate to the arm's-length reallocation power of IRC 482. Even if a related-party intangible sale produces a particular source result under IRC 865(d), the IRS may reallocate income under IRC 482 on the grounds that the pricing did not reflect an arm's-length result -- which may also recharacterize the nature of the payment (e.g., from a capital gain to a royalty), altering the IRC 865(d) analysis. Practitioners structuring cross-border intangible transfers must document arm's-length pricing independently and not assume that a favorable sourcing outcome under IRC 865(d) is unassailable in the transfer pricing context. Verify current IRC 482 and IRC 865(d) interaction rules at IRS.gov.
IRC 865(e) is the most practically significant override of the foreign-source default for nonresidents. It provides that if a nonresident has a US office or other fixed place of business and a sale of personal property is attributable to that US office, the gain from the sale is US-source income -- regardless of the nonresident's general residence status.
The attribution standard in Reg. 1.865-3 requires that the US office be a material factor in the production of the gain and that the US office regularly deal in property of the type sold. This is a facts-and-circumstances determination. A US office that simply provides administrative support or back-office functions is less likely to satisfy the attribution standard than a US office that negotiates, contracts for, or manages the sales activity that generates the gain. The regulation distinguishes between a US office that is the proximate cause of the income and one that is merely incidentally involved.
The consequence of US office attribution is that the gain is generally treated as ECI -- effectively connected to a US trade or business -- and is subject to US net-basis tax at graduated rates. For a foreign corporation, ECI is taxed at the US corporate rate. ECI is not subject to 30 percent FDAP withholding; instead, the foreign taxpayer must file a US income tax return and pay tax on net ECI. Verify current ECI rules, the treaty permanent establishment interaction, and the tax return filing obligations at IRS.gov.
The IRC 865(e) US office attribution rule parallels the permanent establishment (PE) concept in income tax treaties, but they are not identical. A US office that satisfies the IRC 865(e) attribution test may not constitute a PE under an applicable treaty, or vice versa. Where a treaty is in force, a nonresident may claim treaty protection against US taxation on business profits absent a PE, even if IRC 865(e) would otherwise source the gain as US income. The treaty claim requires a valid Form 8833 disclosure on the US tax return. Verify current treaty PE definitions, US treaty network positions, and Form 8833 requirements at IRS.gov.
IRC 865(g) is an anti-abuse provision that addresses the use of related parties to manipulate the sourcing of personal property gains. Without this rule, a taxpayer could route a sale through a related entity to convert US-source gain into foreign-source gain, or vice versa, by structuring the transaction so that the immediate seller is in a different sourcing position than the ultimate economic seller would be.
Under IRC 865(g), when personal property is sold between related parties -- related by reference to the rules in IRC 267 and IRC 707(b) -- the source of the gain is determined as if the sale had been made directly to an unrelated third party. The intervening related-party structure is disregarded for sourcing purposes. This means the applicable exception in IRC 865(b) through (f) is applied to the facts as if the seller were selling to arm's length, regardless of the actual related-party identity of the buyer.
Practitioners analyzing cross-border related-party sales of personal property must apply the IRC 865(g) look-through analysis at the outset, before determining which sourcing rule applies. The related-party definition under IRC 267 includes family members, corporations where the seller owns more than 50 percent, and certain other relationships; verify the full list and current attribution rules at IRS.gov.
IRC 865(h) provides sourcing rules specific to gains from sales of stock in corporations and interests in partnerships, which are personal property but raise distinct policy considerations because their value derives from the underlying assets and operations of the entity.
Under the general rule of IRC 865(h), gain from the sale of stock or a partnership interest is sourced under the IRC 865(a) residency default. A nonresident's gain on the sale of foreign corporation stock is therefore generally foreign-source absent an override. A nonresident's gain on the sale of domestic corporation stock is generally foreign-source under the residency default unless one of the overrides applies.
IRC 865(h) provides a look-through rule for gain from the sale of stock in a foreign corporation in which the seller owns 10 percent or more. In that case, the gain is sourced in proportion to the accumulated earnings and profits of the foreign corporation that are attributable to US-source income versus foreign-source income. This rule prevents a US shareholder from converting what would be US-source dividend income (had the earnings been distributed) into foreign-source capital gain simply by selling the stock rather than receiving a dividend. Verify the current look-through computation and accumulated E&P allocation rules at IRS.gov.
The single most important override for stock sales is FIRPTA under IRC 897. If the stock sold is a US real property interest (USRPI) because the corporation is a US real property holding corporation (USRPHC) -- a domestic corporation whose USRPI assets exceed 50 percent of the sum of its USRPI assets, foreign real property assets, and other assets used in a trade or business -- FIRPTA applies regardless of the IRC 865(h) sourcing analysis. FIRPTA gain is ECI, and the buyer is required to withhold under IRC 1445. The USRPHC test must be applied each time a sale is being analyzed because a corporation's asset composition changes over time. Verify current USRPHC testing rules, the five-year lookback period, and the regularly-traded-stock exception at IRS.gov.
Digital assets -- cryptocurrency, stablecoins, non-fungible tokens (NFTs), and other blockchain-based property -- are treated as property for US federal income tax purposes under IRS Notice 2014-21. As property, gains from digital asset sales are subject to IRC 865 sourcing analysis. The application of that analysis to digital assets raises questions that the IRS has not yet fully addressed in guidance as of the date of this publication.
Under the IRC 865(a) residency default, a nonresident's gain from the sale of digital assets is foreign-source income. A nonresident who sells cryptocurrency on a peer-to-peer basis or through a non-US platform, without a US office, generally has no US-source gain and no US tax exposure on that gain. This analysis assumes the digital asset is not a US real property interest (which digital assets generally are not) and that the seller does not have a US office attributable to the sale.
Stablecoins -- digital assets pegged to fiat currencies or other reference assets -- are also treated as property under IRS Notice 2014-21. The same IRC 865 sourcing analysis applies to gain from the sale or exchange of stablecoins. However, transactions that result in no material gain or loss (such as the exchange of a dollar-pegged stablecoin for dollars at a 1:1 ratio) may not produce income requiring sourcing analysis. Verify current stablecoin tax treatment and any updated IRS guidance at IRS.gov.
The most significant IRC 865 issue for nonresident digital asset sellers is the US office attribution rule under IRC 865(e). If a nonresident sells digital assets through a US-based exchange and that exchange activity is attributable to a US office of the nonresident, the gain may be US-source ECI. The threshold question is whether using a US exchange constitutes having a US office -- which in most cases it does not, because the exchange is the US person, not the nonresident. However, nonresidents who maintain trading accounts, employ US-based traders, or operate digital asset trading desks through US entities face more complex attribution analysis. Verify current digital asset sourcing rules and the US office attribution standard under Reg. 1.865-3 at IRS.gov.
The One Big Beautiful Bill Act (OBBBA) expanded the definition of "broker" for digital asset information reporting purposes, requiring US-based digital asset platforms and certain other intermediaries to report customer transactions, including those of foreign persons, to the IRS on Form 1099-DA. This expanded reporting creates an information trail that the IRS can use to cross-check sourcing positions taken by nonresident sellers. For nonresidents transacting through US-based digital asset brokers, the existence of Form 1099-DA reporting does not by itself create US-source income, but it does increase audit risk for nonresidents who have not properly analyzed the IRC 865(e) attribution question. Verify current OBBBA broker reporting requirements for digital assets, the scope of the foreign person reporting obligations, and the implementation timeline at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.
The source classification of gain under IRC 865 determines how it flows into the IRC 904 FTC limitation calculation. Getting the basket right is as important as getting the source right: foreign-source gain placed in the wrong basket can produce a limitation that fails to absorb the foreign taxes paid on that income.
Foreign-source gain from the sale of personal property by a US resident that does not qualify for the passive category basket is generally assigned to the general limitation basket. For a US taxpayer with foreign operations, general basket foreign-source income absorbs foreign taxes from business operations and active investments. Verify current general basket definitions and the high-tax kickout rule at IRS.gov.
Capital gain income that would be taxed at preferential US rates -- including long-term capital gain from personal property sales -- may be passive category income if it meets the passive income definition in IRC 904(d)(2)(B). However, the high-tax kickout rule in IRC 904(d)(2)(B)(iii) can move income out of the passive basket if the effective foreign tax rate exceeds the US rate. Verify current passive basket definitions, high-tax kickout thresholds, and post-OBBBA changes at IRS.gov.
The OBBBA created a new basket for net controlled transactions income (NCTI) arising in the context of GILTI and related-party transactions. Gain from certain personal property sales between related controlled foreign corporations and their US shareholders may be assigned to the NCTI basket depending on the character and structuring of the transaction. This basket interacts with the IRC 865(g) related-party rule and requires careful analysis in any CFC group disposition. Verify current NCTI basket definitions and the post-OBBBA transition rules at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.
IRC 865-sourced gains are gross income items subject to the Reg. 1.861-8 expense allocation framework. Deductions attributable to activities that generate the personal property gain must be allocated and apportioned between the statutory grouping (the relevant FTC basket) and the residual grouping. Failure to properly apportion expenses against IRC 865 gain overstates net foreign-source taxable income in the basket and inflates the FTC limitation. Verify current Reg. 1.861-8 interaction with IRC 865 gain items at IRS.gov.
IRC 865 source analysis does not exist in isolation -- it drives compliance obligations on specific forms and triggers withholding requirements that must be discharged at or before closing.
A nonresident alien who has US-source gain from a personal property sale that is ECI (for example, gain attributable to a US office under IRC 865(e)) must file Form 1040-NR (US Nonresident Alien Income Tax Return) and report net ECI on Schedule D. A nonresident with only foreign-source personal property gain and no US trade or business generally has no US reporting obligation for that gain. A US resident who sells personal property with foreign-source gain (such as gain on inventory sold abroad) reports the gross gain on Schedule D of Form 1040 and then claims the FTC on Form 1116 (individuals) or Form 1118 (corporations), using the IRC 865 source classification to establish the foreign-source portion.
Form 8865 (Return of US Persons With Respect to Certain Foreign Partnerships) is required for US persons with reportable ownership interests in foreign partnerships. Where a foreign partnership sells personal property, the IRC 865 sourcing analysis is conducted at the partnership level, and each partner's distributive share retains the sourced character. US partners receiving foreign-source or US-source gain through a foreign partnership must report the gain on Form 8865 and trace the source through to their individual FTC computations. Verify current Form 8865 filing thresholds and the Schedule K-1 character passthrough rules at IRS.gov.
Where a sale of stock or a partnership interest triggers FIRPTA because the interest is a USRPI, the buyer must withhold under IRC 1445. The withholding rate is generally 15 percent of the amount realized; verify the current rate and applicable exceptions (including the residence and price-ceiling exceptions) at IRS.gov. The seller may apply for a withholding certificate (Form 8288-B) to reduce withholding to the actual tax expected to be due. The buyer files Form 8288 and Form 8288-A to report and remit the withholding. Verify all current FIRPTA withholding procedures, deadlines, and treaty-based exemptions at IRS.gov.
| Scenario | Default Source | Exception / Override | FTC Basket | Withholding | Form Required |
|---|---|---|---|---|---|
| US resident seller (general personal property) | US-source (IRC 865(a)) | None unless foreign-source exception applies | Does not generate foreign-source FTC limitation income | N/A (US person) | Schedule D, Form 1040 |
| Nonresident seller (general personal property) | Foreign-source (IRC 865(a)) | US office attribution (IRC 865(e)) can override | N/A (foreign-source, no US tax) | None unless ECI via IRC 865(e) | Form 1040-NR if ECI |
| Inventory (manufactured) -- cross-border | 50/50 split (Reg. 1.863-3) | Production activity vs. sales activity allocation | General basket (foreign-source portion) | Depends on US-source ECI determination | Form 1120 or 1040; verify at IRS.gov |
| Inventory (purchased) -- cross-border | Destination-of-sale test (IRC 865(b)) | Post-TCJA; title-passage rule eliminated | General basket (foreign-source portion) | Depends on US-source ECI determination | Form 1120 or 1040; verify at IRS.gov |
| Depreciable personal property | Bifurcated (IRC 865(c)) | Recapture gain sourced by location of use; residual gain by residency | General basket (ECI portion); passive or general (residual) | If recapture is US-source ECI, net-basis tax applies | Form 4797; Schedule D; Form 1040-NR if NRA |
| Intangibles (contingent payment) | Sourced as royalty -- location of use (IRC 865(d)(1)(A)) | Contingent payment rule overrides residency default | General or passive basket depending on character | 30% FDAP if US-source royalty to NRA; verify at IRS.gov | Form 1042-S for FDAP; Schedule D for capital portion |
| Goodwill | Place of business (IRC 865(d)) | Location of business; enterprise vs. location goodwill allocation | General basket (foreign goodwill) | Depends on US-source determination | Form 8594; Schedule D; verify at IRS.gov |
| US office attribution (nonresident) | US-source ECI (IRC 865(e)) | Overrides foreign-source default; treaty PE may protect | N/A -- ECI, not FTC limitation income | Net-basis US tax; no FDAP withholding on ECI | Form 1040-NR; Form 8833 if treaty claimed |
| Stock sale (nonresident -- non-USRPHC) | Foreign-source (IRC 865(h) and IRC 865(a)) | 10%-owned FC look-through applies; FIRPTA overrides if USRPHC | N/A (foreign-source, no US tax unless FIRPTA) | None unless FIRPTA applies | Form 1040-NR if FIRPTA; Form 8288 (buyer) |
| Partnership interest sale (nonresident) | Foreign-source (IRC 865(a) default) | FIRPTA if USRPI; ordinary income components may be ECI | N/A (foreign-source default); ECI if FIRPTA applies | IRC 1445 if FIRPTA; IRC 1446(f) on ECI portion | Form 8288 (buyer); Form 1040-NR (seller if ECI) |
| Digital assets (nonresident) | Foreign-source (IRC 865(a) default) | US office attribution (IRC 865(e)) if trading via US office | N/A (foreign-source default) | None unless ECI via IRC 865(e) | Form 1040-NR if ECI; Form 1099-DA (broker); verify OBBBA rules at IRS.gov |
All entries are general sourcing frameworks. Verify current law, applicable treaties, and regulatory guidance at IRS.gov before applying to any specific transaction. This table does not constitute legal or tax advice.
IRC 865(a) establishes residency as the baseline sourcing rule for gain recognized on the sale of personal property. Under the default rule, gain recognized by a US resident on the sale of personal property is treated as US-source income, and gain recognized by a nonresident on the sale of personal property is treated as foreign-source income. The residency default applies unless a specific exception in IRC 865(b) through (h) overrides it. For nonresidents, the default rule generally means that capital gains from sales of non-US-situs personal property do not create US-source income and are therefore outside US tax jurisdiction, which matters for foreign tax credit basket planning and for determining whether withholding applies. Verify the current residency classifications and applicable definitions at IRS.gov.
Before the Tax Cuts and Jobs Act of 2017, the source of inventory income was partly determined by where title passed. The TCJA eliminated the title-passage rule for sales of inventory property occurring on or after the effective date. Under current law, sourcing for purchased inventory uses a destination-of-sale test, while sourcing for manufactured inventory follows the 50/50 split under Reg. 1.863-3, allocating income between production activity and sales activity based on production assets and sales. The elimination of the title-passage rule means that contractual structuring around where title formally passes no longer shifts the source of inventory income. Verify the current post-TCJA inventory sourcing rules under IRC 865(b) and Reg. 1.863-3 at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.
IRC 865(c) provides a bifurcation rule for gain on the sale of depreciable personal property. Gain attributable to depreciation deductions claimed in prior years is sourced based on where the property was used during the period the depreciation deductions were taken, not by the seller's residency. The remaining gain (gain in excess of prior depreciation) is sourced under the residency-based default rule in IRC 865(a). This means that a nonresident who used depreciable personal property in the United States and claimed US depreciation deductions will have US-source gain on the recapture portion upon sale, even though the residency default would otherwise make the gain foreign-source. The interaction with IRC 1245 ordinary income recapture is significant: the recapture amount is both ordinary income and, under IRC 865(c), US-source income for a nonresident who used the property in the United States. Verify current depreciation recapture and sourcing rules at IRS.gov.
IRC 865(d) provides special sourcing rules for gain from the sale of intangible property. Under IRC 865(d)(1)(A), gain from the sale of intangibles that is contingent on the productivity, use, or disposition of the intangible is sourced in the same manner as a royalty, meaning it is sourced where the intangible is used or applied. Gain that is not contingent (a fixed, lump-sum payment) is sourced under the IRC 865(a) residency default. Residual goodwill attributable to a specific business location is sourced by the place of business. Self-created intangibles may be treated differently from purchased intangibles. The interaction with IRC 482 transfer pricing is material: in related-party transactions, the arm's-length standard may reallocate income regardless of the contractual sourcing position, and the contingent payment characterization is itself an area where the IRS may recharacterize a purported capital gain into royalty income. Verify current intangible sourcing and transfer pricing interaction rules at IRS.gov.
IRC 865(e) overrides the residency-based foreign-source default for nonresidents when a sale of personal property is attributable to a US office or other fixed place of business of the nonresident. If a nonresident maintains a US office and the sale is attributable to that office, the gain is treated as US-source income even though the nonresident is not a US resident. The attribution standard under Reg. 1.865-3 generally requires that the US office be a material factor in the production of the income and that it regularly deal in property of the type sold. The consequence is significant: US-source gain attributable to a US office is generally treated as effectively connected income (ECI) and is subject to US net-basis taxation at graduated rates rather than the 30 percent FDAP withholding rate. Verify the current attribution standards and the interaction with income tax treaty permanent establishment articles at IRS.gov.
IRC 865(g) provides an anti-abuse rule for sales of personal property between related parties. When a taxpayer sells personal property to a related party (as defined by reference to the relationships in IRC 267 and IRC 707(b)), the source of the gain is determined as if the sale had been made to an unrelated third party. This rule prevents nonresidents from routing sales of US-sourced gain property through related entities in order to convert what would be US-source income (under one of the exceptions in IRC 865(b) through (f)) into foreign-source income by virtue of the related party relationship. Practitioners analyzing cross-border related-party sales must apply the IRC 865(g) look-through discipline and independently verify the source that would apply to a sale to an arm's-length third party. Verify current related-party definitions and anti-abuse rules at IRS.gov.
IRC 865(h) governs sourcing of gain from the sale of stock in a corporation and interests in partnerships. Under the general rule, gain from the sale of stock or a partnership interest is sourced under the IRC 865(a) residency default, meaning a nonresident's gain on stock sold outside a US office is foreign-source. However, a look-through rule applies to gain from the sale of stock in a 10-percent-or-more owned foreign corporation: the gain is sourced in proportion to the accumulated earnings and profits of the corporation that are attributable to US-source income. The interaction with FIRPTA under IRC 897 is critical: if the stock sold is a US real property interest (USRPI) because the corporation is a US real property holding corporation (USRPHC), FIRPTA overrides the IRC 865 sourcing analysis and treats the gain as effectively connected income subject to withholding under IRC 1445. Verify current stock, partnership interest, and FIRPTA sourcing rules at IRS.gov.
Digital assets (including cryptocurrency and stablecoins) are treated as property for US federal tax purposes under IRS Notice 2014-21. As property, gain from the sale of digital assets by a nonresident is generally sourced under the IRC 865(a) residency default as foreign-source income, absent a US office attribution under IRC 865(e). A nonresident selling digital assets through a US-based exchange or broker may trigger the US office attribution rule under IRC 865(e) if the exchange or trading activity is attributable to a US office. The One Big Beautiful Bill Act (OBBBA) expanded digital asset broker reporting requirements, which has sourcing implications because broker-reported transactions create an information trail that the IRS may use to evaluate sourcing positions and withholding compliance. Verify the current OBBBA broker reporting rules for digital assets, the definition of digital asset broker, and the implementation timeline at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.
Last reviewed: July 2026. This guide is a practitioner reference only and does not constitute legal or tax advice. Verify all statutory and regulatory citations at IRS.gov. Consult qualified independent counsel for advice on specific transactions.