I think there's some confusion here that needs clarifying. If you are a US resident for tax reporting purposes, your interest is reported in the United States under the terms of the US/Germany tax treaty. I like to point out two provisions in the tax treaty.
- Under Article 11, it says "Interest derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State".
- Now in Article 3 of the treaty, it states " the term "a Contracting State" and "the other Contracting State" mean the United States or the Federal Republic of Germany as the context requires. This implies that the "contracting State" is the United States" since you are a resident.
- In Article 4, " For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation etc".
From the context of the language, it suggests that interest is only taxable to a resident of a contracting state, which in this instance, is the US. You should not make any gross income adjustments based on this fact.
Report the total Gross Income on form 1116 to receive full credit for your capital gains tax that was assessed in Germany.
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