It depends. Allow me to give you a brief primer on the concept of foreign taxes and then how the FTC is determined by the US.
- First of all, most foreign income taxes are determined from gross income, without regard of any loss.
- Now when this capital gain income is reported in your US tax return, you are taxed on the net capital gain if there is a capital gain.
Now the Foreign tax credit is based on a formula that takes the Foreign Taxes paid and multiplies it by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources.
The foreign losses you refer to are used on your US tax return to determine your net capital gain. It is accounted for in the the denominator since the denominator includes the net capital gain (not gross amount) as total income. What this does is reduce the ratio (numerator/denominator) and gives you a bigger Foreign Tax Credit. This total income amount is also reflected in 3e of the Form 1116.
I realize this may sound confusing but if you follow the logic, it does make sense. This follows the path on what PK mentioned but expressed differently. PK did well explaining this also.
@PV24
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