Answer Target: For an expatriation in 2026, and subject to the limited Section 877A(g)(1)(B) exceptions from the first two tests, an individual is a covered expatriate if their five year average annual net income tax liability is more than USD 211,000, their net worth is at least USD 2,000,000, or they fail to certify five preceding years of federal tax compliance on Form 8854. Section 877A generally applies a deemed sale to property held on the day before expatriation and reduces the resulting net gain by USD 910,000. Special rules apply to deferred compensation, specified tax deferred accounts and interests in nongrantor trusts.
These rules do not apply merely because someone leaves the United States or changes tax residence. They concern a US citizen who relinquishes citizenship and a specified long term resident who ends lawful permanent resident status for federal tax purposes. A long term resident is generally someone who held lawful permanent resident status in at least eight of the fifteen tax years ending with the year that status ends, subject to the treaty rule in Section 877(e)(2).
This analysis reflects the Internal Revenue Code, current IRS material and legislation available on 25 August 2026. The statutory framework is consistent with our broader cross border exit tax planning guide: covered status, asset treatment, filing and payment are separate questions.
The Three Covered Expatriate Tests
Section 877A(g)(1) incorporates the three tests in Section 877(a)(2). Meeting any one test is sufficient, although Section 877A(g)(1)(B) provides limited exceptions from the liability and net worth tests. Those exceptions do not apply to the compliance certification test.
| Test | Rule for a 2026 expatriation |
|---|---|
| Average annual net income tax liability | More than USD 211,000 for the five tax years ending before the expatriation date, subject to the limited Section 877A(g)(1)(B) exceptions |
| Net worth | USD 2,000,000 or more on the expatriation date, subject to the limited Section 877A(g)(1)(B) exceptions |
| Compliance certification | Failure to certify five preceding tax years of federal tax compliance on Form 8854, or failure to provide required evidence; no Section 877A(g)(1)(B) exception applies |
Revenue Procedure 2025-32 confirms the USD 211,000 figure. It is not a forecast. The liability test concerns average annual net income tax liability, not income or adjusted gross income. The current Form 8854 instructions calculate the relevant tax for each lookback year using total tax less the foreign tax credit identified in those instructions.
The USD 2,000,000 net worth threshold is not indexed. The balance sheet analysis extends across worldwide property and legal interests. Valuation is therefore central for private company shares, trusts, pensions, life insurance and digital assets.
The certification test applies independently of the two financial tests. The individual must certify under penalty of perjury that all federal tax obligations for the five preceding tax years have been met and must provide any evidence the IRS requires. Filing Form 8854 without a supportable certification does not cure an underlying compliance failure.
Limited Exceptions
Section 877A(g)(1)(B) provides limited exceptions from the liability and net worth tests for two groups:
- Certain dual citizens at birth who remain citizens and tax residents of the other country and were US residents under the Section 7701(b)(1)(A)(ii) substantial presence test for no more than ten of the fifteen relevant tax years.
- Certain individuals who relinquish citizenship before age eighteen and a half and were US residents under that same substantial presence test for no more than ten tax years before relinquishment.
The residence count for these exceptions is therefore the statutory substantial presence count, not a generic reference to any US residence status. These exceptions do not disapply the compliance certification test. A qualifying dual citizen or minor can still be a covered expatriate by failing to certify five years of federal tax compliance.
What Section 877A Taxes
Section 877A(a) generally treats a covered expatriate's property as sold at fair market value on the day before the expatriation date. Gain is recognised for that tax year. Loss is recognised only to the extent otherwise allowed by the Code, although the Section 1091 wash sale rule does not apply.
Revenue Procedure 2025-32 sets the 2026 gain exclusion at USD 910,000. This is a reduction against net gain otherwise included under the deemed sale rule. It is not a covered expatriate threshold and it does not reduce net worth for the USD 2,000,000 test.
Notice 2009-85 requires the exclusion to be allocated proportionately across all gain assets subject to the mark to market regime. The taxpayer cannot direct the entire exclusion to a preferred asset. Each individual has one lifetime exclusion amount, with special treatment for a later expatriation after resuming US citizenship or long term residence.
Basis Rule for Property Held at First US Residence
Section 877A(h)(2) applies a special basis floor solely for calculating tax under the mark to market rule. Property held when an individual first became a US resident is treated as having a basis on that date of not less than its fair market value on that date. The individual can elect not to apply this basis rule, but that election is irrevocable.
The rule requires evidence of the first US residence date, the property held on that date and its fair market value. It does not apply to property acquired later, and it does not create a general basis adjustment for other tax purposes.
Worked Gain Example
Consider the following simplified property subject to the general mark to market rule. The stated adjusted bases assume either that Section 877A(h)(2) does not apply to the asset or that the basis already reflects its basis floor. If an individual made the irrevocable election not to apply Section 877A(h)(2), the ordinary basis record would instead govern for this purpose:
| Asset | Adjusted basis | Fair market value | Deemed gain |
|---|---|---|---|
| Bitcoin | USD 0 | USD 2,200,000 | USD 2,200,000 |
| Ether | USD 0 | USD 800,000 | USD 800,000 |
| Listed equities | USD 900,000 | USD 1,400,000 | USD 500,000 |
| Total | USD 900,000 | USD 4,400,000 | USD 3,500,000 |
The 2026 calculation begins with USD 3,500,000 of deemed gain and reduces it by USD 910,000, leaving USD 2,590,000 before applying the character, loss limitation and rate rules relevant to each asset. Notice 2009-85 allocates the USD 910,000 proportionately among the three gain assets.
This example does not estimate tax due. Section 877A does not impose one universal capital gains rate. Asset character, holding period, other income, deductions and separate Code provisions affect the return calculation.
Digital assets are property for federal income tax purposes under IRS Notice 2014-21. A deemed sale therefore requires a complete inventory, supportable adjusted basis and fair market value on the day before expatriation. Broker reporting on Form 1099-DA does not replace the taxpayer's own basis and valuation evidence. Under TD 10000, gross proceeds reporting generally began for qualifying 2025 broker sales. Mandatory broker basis reporting generally begins for dispositions of qualifying covered digital assets acquired on or after 1 January 2026.
Assets Outside the General Deemed Sale
Section 877A(c) removes three categories from the general mark to market rule and substitutes specific treatment.
| Category | Statutory treatment |
|---|---|
| Deferred compensation | Eligible items are generally subject to 30 per cent withholding on taxable payments after the required payor status, notice and treaty waiver conditions are met. Ineligible items are generally treated as paid at present value on the day before expatriation, subject to the separate rule for service related property rights. |
| Specified tax deferred accounts | The entire interest is generally treated as distributed on the day before expatriation, without an early distribution tax solely because of that treatment. |
| Interest in a nongrantor trust | A trust of which the covered expatriate was a beneficiary on the day before expatriation is generally subject to 30 per cent withholding on the taxable portion of later distributions. An appreciated in kind distribution can also cause gain recognition to the trust. |
The definitions are technical. Specified tax deferred accounts include the accounts listed in Section 877A(e)(2), while deferred compensation extends beyond a conventional employer pension.
An eligible deferred compensation item requires a payor that is a US person or a non US person that elects to be treated as a US person for this purpose and meets the Secretary's requirements. The covered expatriate must notify the payor of covered status and make the irrevocable treaty withholding waiver. Form W-8CE is central to that notice process.
For an ineligible item described in Section 877A(d)(4)(D), meaning specified property or a right to property connected with services and not previously taken into account under Section 83, the rights are treated as transferable and no longer subject to a substantial risk of forfeiture on the day before expatriation. This is distinct from treating a conventional accrued benefit as a present value distribution.
Section 877A(d)(5) also excludes the eligible and ineligible deferred compensation rules to the extent an item is attributable to services performed outside the United States while the covered expatriate was not a US citizen or resident. The service period and tax status must therefore be traced rather than assuming the whole item follows one treatment.
A grantor trust is different. Notice 2009-85 states that assets in a portion treated as owned by the expatriate under Sections 671 through 679 are generally within the mark to market regime.
Coordination With Section 684
Section 684 generally recognises gain when a US person transfers appreciated property to a foreign trust, unless the statutory owner trust exception applies. A change caused by expatriation can also matter. For example, expatriation can cause a domestic trust to become foreign and can end the expatriate's treatment as owner.
Section 877A(h)(3) applies Section 684 first where expatriation would trigger both provisions. Notice 2009-85 states that gain taxed under Section 684 is not taxed again under the Section 877A mark to market regime. Moving appreciated assets into a foreign trust is therefore not a reliable method of avoiding deemed gain.
Form 8854 and the Certification Record
An individual expatriating in 2026 must use the Form 8854 and instructions applicable to that filing year when available. The latest published instructions establish the following framework:
- An initial Form 8854 is required for a citizen who relinquishes citizenship or a long term resident who ends that status.
- The form is filed for the tax year containing the expatriation date, following the delivery and return attachment instructions then in force.
- The initial statement records the five year tax liability test, net worth, compliance certification, balance sheet and any Section 877A computations.
- A USD 10,000 penalty can apply for a required form that is missing, incomplete or incorrect, absent reasonable cause and where the statutory conditions are met.
- Annual Form 8854 filing continues for specified cases involving deferred tax, eligible deferred compensation or a nongrantor trust.
Form 8854 is required even where the financial tests are not met. The precise consequence of a filing failure should not be collapsed into one slogan. Failure to make the five year certification creates covered expatriate status, while Section 6039G separately provides information reporting and penalty rules.
The filing date is not necessarily a generic 15 June deadline. It depends on the return required, the individual's filing position and valid extensions. The current Form 8854 instructions should be followed for the actual year.
Gifts, Trusts and Public Law 119-21
Public Law 119-21 was enacted on 4 July 2025. Section 70106 amended Section 2010(c)(3) to establish a USD 15,000,000 basic estate and gift tax exclusion amount for estates of decedents dying and gifts made after 31 December 2025, indexed thereafter. This replaced the previous sunset structure.
The USD 15,000,000 amount does not change the USD 2,000,000 covered expatriate net worth test or the USD 910,000 Section 877A gain exclusion. It also does not make every transfer before expatriation tax neutral.
An outright lifetime gift can carry the donor's basis to the recipient under Section 1015 and can require a federal gift tax return. A transfer to a foreign trust can trigger Section 684. Retained rights or beneficial interests can remain relevant to the expatriate's net worth and property analysis. The legal ownership, valuation, gift tax, income tax and reporting effects must all be tested before treating a transfer as reducing Section 877A exposure.
Section 2801 After Expatriation
Section 2801 is a separate recipient level transfer tax. At the current highest estate tax rate, it generally imposes tax at 40 per cent when a US citizen or US resident receives covered gifts or bequests from a covered expatriate above the annual Section 2801(c) amount. For 2026, that amount is USD 19,000 in aggregate for covered gifts and bequests received by the person during the calendar year. It is not a separate exclusion for each transfer or each covered expatriate. Residence for this purpose is based on domicile, not the income tax residence test.
The recipient pays the tax. A domestic trust pays when it receives a covered transfer. For a nonelecting foreign trust, the charge generally arises when an attributable distribution reaches a US citizen or resident. Statutory exceptions include specified transfers properly reported as taxable gifts or as part of the covered expatriate's gross estate, and transfers that would qualify for the relevant spouse or charity deduction.
The final Section 2801 regulations took effect on 14 January 2025. The IRS now uses Form 708 for reporting and payment. Under the general deadline, Form 708 is due by the fifteenth day of the eighteenth month following the close of the calendar year in which the covered gift or bequest was received. A 2026 receipt subject to that general rule is therefore reported by 15 June 2028. Special timing rules apply to certain covered bequests, migrated foreign trusts and foreign trusts electing domestic treatment, and an extension to file does not extend the payment deadline. The current Form 708 instructions must be applied to the actual facts.
There is no general ten year expiry for Section 2801, so succession planning must test the status of the transferor, recipient and any trust at the time specified by the statute.
A Defensible Review Sequence
A reliable expatriation analysis proceeds in order:
- Confirm whether the individual is a US citizen or long term resident within Section 877A.
- Fix the legal expatriation date under Section 877A(g).
- Reconcile five years of federal tax obligations and prepare the Form 8854 certification evidence.
- Determine the five year average tax liability and net worth under the statutory tests.
- Classify every asset between the general mark to market rule and the special categories.
- Establish adjusted basis and fair market value with contemporaneous evidence, including the first US residence date and Section 877A(h)(2) basis floor where relevant. Confirm whether the individual made the irrevocable election not to apply that basis rule.
- Test any trust or gift against Sections 684, 877A and 2801, as well as the ordinary gift and estate tax rules.
- Model filing, payment, security and liquidity separately. Section 877A(b) permits a property specific deferral election only with adequate security, interest and an irrevocable treaty rights waiver.
No entity, trust, gift or financing arrangement should be presented as a standard exit tax solution. The result depends on the governing documents, retained rights, asset character, valuation and the tax status of each person involved.
Frequently Asked Questions
What are the 2026 covered expatriate figures?
The five year average annual net income tax liability threshold is more than USD 211,000. The net worth test remains USD 2,000,000 or more. The Section 877A gain exclusion is USD 910,000. Revenue Procedure 2025-32 confirms both indexed 2026 figures. The Section 877A(g)(1)(B) exceptions can remove the liability and net worth tests for qualifying dual citizens and minors, but they do not remove the compliance certification test.
What estate and gift tax exclusion applies from 2026?
Public Law 119-21 established a USD 15,000,000 basic exclusion amount for gifts made and estates of decedents dying after 31 December 2025, indexed thereafter.
Can a gift or foreign trust remove appreciated property from exit tax?
Not as a general rule. A transfer can have gift tax and reporting consequences, Section 684 can recognise gain on a transfer to a foreign trust, and retained rights can remain relevant under Section 877A. Each arrangement requires its own statutory analysis.
Does Section 2801 apply to the covered expatriate or the recipient?
The recipient generally bears the Section 2801 tax. It can apply to a US citizen or resident receiving a covered gift or bequest, to a domestic trust receiving one, or to an attributable distribution from a nonelecting foreign trust. For 2026, the Section 2801(c) amount is USD 19,000 in aggregate for the calendar year. Under the general rule, a required Form 708 is due by the fifteenth day of the eighteenth month after that calendar year closes, but special timing rules can apply.
Is all Section 877A tax payable immediately?
Not necessarily. Section 877A(b) permits an irrevocable property specific deferral election, but adequate security, interest and a waiver of treaty rights that would prevent assessment or collection are required. Special asset categories follow their own timing rules.
Primary Sources
- Internal Revenue Code Section 877
- Internal Revenue Code Section 877A
- Internal Revenue Code Section 2801
- Internal Revenue Code Section 684
- IRS Revenue Procedure 2025-32
- IRS Notice 2009-85
- IRS Instructions for Form 8854
- IRS Instructions for Form 708
- Public Law 119-21, section 70106
- IRS Notice 2014-21 on virtual currency
- TD 10000, 89 FR 56480
- IRS guidance on Form 1099-DA
The analysis is informational and does not replace advice from qualified US tax and legal professionals based on complete facts. We welcome a confidential conversation to coordinate the relevant specialist review.
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