# Can the FTC on general category income off set taxes on short-term capital gains?



## martinelli95 (5 mo ago)

Hey everyone.. stumbled upon this community and figured I'd give it a shot! Accounting major so perhaps I can help out down the road as well 

I have been using the FTC (Form 1116) successfully since 2018 to off-set my Federal Tax Liability. Accumulating about $10K credit carry forward. Note - I haveonly had General Category Income (aka a salary) all these years.

This year things are diferent. I have for the first time a short term capital gain of $12k! This gain was untaxed by my country of residence. The question is...

*Can I use my FTC accumulated from past years (on general category income) off-set the taxes on this short term gain?*

On one hand the IRS treats STCGs as "ordinary income" so this would make sense to me.. but when I filled out the forms, it says I owe money.


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## Moulard (Feb 3, 2017)

Capital gains not related to the active conduct of a trade or business are generally considered passive income for the purpose of foreign tax credits. 

So the short answer to your question is no.


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## martinelli95 (5 mo ago)

Moulard said:


> Capital gains not related to the active conduct of a trade or business are generally considered passive income for the purpose of foreign tax credits.
> 
> So the short answer to your question is no.


Thank you very much! That is the conclusion I had come to as well.

I think I am going to switch to the FEIE - use it FEIE to exclude my general income (salary), then use the Standard Deduction to exclude my $12K short term capital gain.

Otherwise based on the papers I am filling out, the $12k short term capital gain ends up getting taxed.

Unless there is a way to apply the standard deduction AFTER I have taken the credit. But that doesn't seem possible from what I recall in accounting. Deductions first, then last credits.


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## Moulard (Feb 3, 2017)

martinelli95 said:


> I think I am going to switch to the FEIE - use it FEIE to exclude my general income (salary), then use the Standard Deduction to exclude my $12K short term capital gain.


Unless its been over 5 years since you first started using FTCs on your general income, you cannot revert to FEIE without a private letter ruling from the IRS.


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## martinelli95 (5 mo ago)

Moulard said:


> Unless its been over 5 years since you first started using FTCs on your general income, you cannot revert to FEIE without a private letter ruling from the IRS.



Thanks for this - I only started paying taxes 3 years ago as I am quite young! I never started using the FEIE so I never formally revoked it. 

From what I am reading I should be in the clear here.


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## Moulard (Feb 3, 2017)

You don't need to have formally revoked it. Its getting quite late for me so I don't have references at hand but from the US perspective...

Simply taking a tax position which is contrary to the rules and intent of the FEIE is enough if it ever got so far as the US tax court.


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## martinelli95 (5 mo ago)

Moulard said:


> You don't need to have formally revoked it. Its getting quite late for me so I don't have references at hand but from the US perspective...
> 
> Simply taking a tax position which is contrary to the rules and intent of the FEIE is enough if it ever got so far as the US tax court.



Good to know. I may have to take my chances on my measly income though. Thanks again.


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