Generally it's the dividends that get taxed by foreign governments, not the stock sales. I just filled this out this morning.
This is correct, however that in itself doesn't necessarily answer the question whether a stock sale is foreign sourced income or domestic sourced income.
Interestingly, TT does not include the entry "various" for the country in the interview, but it is there in the forms view if you have the desktop software.
It is indeed there in the desktop software however it appears that "Various" as a country designation is frowned upon. While I have used "Various" in the past, I am now breaking the 1009-DIVs apart, using separate country designations (if I have taxes withheld from more than one foreign country in that account). This "breaking apart" is actually what the TT desktop software suggests to do in their UI.
I did not have success following the interview questions. I tried, but I had to go back and make corrections in the form view. Perhaps this will get better in future years, or I will. Form 1116 is used for many different kinds of tax situations, the least of which may be taxes on dividends of foreign companies, hence the application of the form to this particular situation is more obscure. Maybe the IRS will design another form some day?! (I'm not holding my breath.)
During the many years I have filled out this form it has never gotten any better. That is largely TT's fault doing a crappy job with the interview mode for this form. E.g. the manual breaking up of 1099-DIVs should not be necessary and could be handled by some worksheet within TT. I remember in the past that I always had to go to forms mode to check the box, whether taxes were paid or accrued (I used "paid") and to pick a date for the taxes (I just use Dec 31 of the tax year). That seems to be fixed now.
I do not expect the IRS to design another form, why should they? They're busy enough with other things.
The limit on the credit is the tax rate for your overall return, but the foreign tax rate on dividends might be as high as 20-25% for some countries. (Here's looking at you, Ireland!)
Another limit appears to be that - according to the instructions - you're actually only allowed to claim taxes that you're legally obligated to pay and cannot claw back from that foreign country. IIRC in case of Ireland the tax rate in the tax treaty between Ireland and the U.S. is 15%, and Ireland presumably has some mechanism to reclaim the over-withheld taxes (which is probably cumbersome, so most private investors don't do it). I myself have tax withholdings from Ireland on dividends, but I don't claim the full 25% of Irish taxes withheld, only the 15% of the dividends that are within the treaty rate.
