# Foreign capital gain tax credit and USA capital loss



## tomandeer (Jun 18, 2020)

Hi

Please find my situation below. Because my foreign capital gain is compensated by US capital loss, how should I claim the credit for the foreign tax I paid in foreign capital gain?

Details:
Foreign (Country-India) Equity Stocks Capital Gain : $92,000
Capital Gain TAX already paid in India to Indian authorities (10%) : $9,200
USA Capital Loss:$95,000
Residential Status: US Citizen
Total job salary income filing jointly: $200,000
Amount I Owe for federal return: $11,000

Option 1) Overall capital loss is (3000) if I combined India and USA capital Gain/Loss activity and for that reason, I am not adding India capital gain income into my overall US income. In that case, can I still claim credit for tax paid in India ($9,200) from amount I owe to the federal tax ($11,000)
Option 2) Pay the US own income tax ($11,000) as is and should I Carryback or Carryover India capital gain tax ($9,200) by using Form 1116?


Do I have any other option? I do not want to loose the credit for the tax I paid in India.

Thanks
Regards
Tom


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## Moulard (Feb 3, 2017)

I am going to assume that you are a US Citizen who is a tax resident of India.


Your US return will need to include your global income by virtue of your US citizenship, and...
Your Indian return will need to include your global income by virtue of your Indian residency.

As such...


Option 1 is not valid, as according to US law you cannot simply exclude your Indian capital gain from your global income on your US return.
Option 2 is also not valid, because that is not the way the Foreign tax credits work 

So back to Foreign Tax Credit basics..


The elimination of double taxation will be determined by the rules outlined in the US-India tax treaty. Note the limitation of benefits, typically present in these treaties will mean you will ultimately pay the higher of the two tax rates. In any event you will want to read the capital gains section of the treaty, and any technical memorandum that explains the treaty in terms a human will understand. 

Who has primary taxing rights on the different parts of your income depends on its source.

India will have primary taxing rights on the Indian capital gain, and your (I assume) Indian salary.

The treatment of the capital loss will likely be treated under the domestic laws in both cases but is likely to reduce your overall tax liability.

You may well need to finalise your Indian tax affairs for the year, to understand your tax position - particularly in terms of your capital position and the impact on your overall Indian tax - particularly in light of the US loss.

Remember you can only claim a US foreign tax credit for taxes you have paid or accrued. 

You can claim a foreign tax credit on your US return for both your general income (Wages) and passive income (Capital gains). You will need to split your income, deductions and Indian tax and US tax into those categories and calculate the tax credit separately. 

You basically use the Indian tax paid or accrued to offset the US tax owed on that income. If you paid more Indian tax than US tax owned you will be able to carry over the balance of what is left for up to 10 years. If US taxes are higher, then you will end up owing the US. 

Note that the treaty may alter or cap domestic tax rates on the capital gains/losses portion of your income.


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## tomandeer (Jun 18, 2020)

Moulard said:


> I am going to assume that you are a US Citizen who is a tax resident of India.
> 
> 
> Your US return will need to include your global income by virtue of your US citizenship, and...
> ...


Thanks for your response. But the key question here is can I still take credit of India equity Capital gain taxes which I already paid in India but the underlying India equity capital gain is offset by USA equity capital loss? 

In other words, I am not showing India capital gain as income in usa tax return because it is being offset by my usa capital loss. But I already paid tax in India and need to somehow get credit for the same in USA otherwise I will loose the taxes paid in India.


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## Moulard (Feb 3, 2017)

If you haven't done so already you should carefully read the section on Capital Gains and Losses in Pub 514. 

https://www.irs.gov/pub/irs-pdf/p514.pdf

What with the adjustment of US losses on foreign gains, rate groups, the apportioning of income and taxes between categories it is not easy to explain in a forum post.

You will only ever be able to get a Foreign Tax Credit up to the amount of tax that would be owed on the income in the US. Any India taxes that you have paid in excess of that amount can be carried over for 10 years. So you don't "loose them" but they do time out after 10 years.

Do bear in mind that your US losses will also be reported on your India tax return (again under the assumption you are a tax resident of India) and this may lessen your overall tax liability.


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