Foreign Tax Credit for taxes paid on Capital Gains on equities

[muralinn]

I have short and long term capital gains from sale of shares in stocks that I held in India. I have paid taxes in India on these gains. Can I take credit for these taxes in Form 1116?

[tagteam]

I will page Champ @pk. Please check back later.

[pk]

@muralinn , Namaste ji.

As I understand from you  short post, you  a US person ( citizen/GreenCard/ Resident for Tax purposes )  have sold equities  (  when acquired,  when sold,)  paid Indian tax  ( finalized or  just the usual 20%  or more  collected at source).    

Now the question you are raising is  if you are eligible to use Foreign Tax Credit to mitigate the double taxation of this foreign source income  ( I am assuming here that these equities are bought / sold through your broker in India  and/or these equities are placed/ listed ONLY in India.

While , I await your answer (s ) to the questions I have asked  ( the parenthetical items above ),  in general because India and US have a Tax Treaty in place , including  the double Taxation clause, YES indeed you could use the  Foreign Tax Credit/ Deduction to  ameliorate the effects of double taxation..  Whether you should use the  form 1116 really depends  on your filing status and the quantum of the total foreign tax levied / paid  on this foreign income..

Because you have both short-term and long-term gains  ( per US tax laws ) you need to be careful to make sure that your total foreign source income and foreign taxes paid thereon be properly allocated. / accounted for.

I will circle back once I hear from you .

Namaste ji

pk

[muralinn]

@pk-ji

Thank you very much. More clarifications embedded with your response.

As I understand from you  short post, you  a US person ( citizen/GreenCard/ Resident for Tax purposes )  have sold equities  (  when acquired,  when sold,)  paid Indian tax  ( finalized or  just the usual 20%  or more  collected at source). 
[murali] Correct. I am a US citizen and residing in the US. I have a brokerage account in India that is managed by a management company. We have already filed our Indian tax returns & paid the taxes in India (not just collected at the source). Now we are in the process of filing our 2023 US Income tax.

Now the question you are raising is  if you are eligible to use Foreign Tax Credit to mitigate the double taxation of this foreign source income  ( I am assuming here that these equities are bought / sold through your broker in India  and/or these equities are placed/ listed ONLY in India.

[murali] My question is not about eligibility. I get credit on taxes paid on rental income and dividends from the stocks I own. What is not clear if I can take credit on capital gain taxes on STOCKS I have sold. I know I CAN take credit on the taxes paid on gains from real properties (e.g. real estate) but it is not clear to me if I can take credit for taxes paid in India on the capital gains associated from the Indian stocks in India.

While , I await your answer (s ) to the questions I have asked  ( the parenthetical items above ),  in general because India and US have a Tax Treaty in place , including  the double Taxation clause, YES indeed you could use the  Foreign Tax Credit/ Deduction to  ameliorate the effects of double taxation..  Whether you should use the  form 1116 really depends  on your filing status and the quantum of the total foreign tax levied / paid  on this foreign income..

Because you have both short-term and long-term gains  ( per US tax laws ) you need to be careful to make sure that your total foreign source income and foreign taxes paid thereon be properly allocated. / accounted for.

[murali] Looking forward your reply. Thanks.

[pk]

@muralinn -ji, thank you very much for your detailed response to my questions.

1.  Gains from alienation of assets  (  equities, real-estate business etc. )   and taxed by a foreign  taxing authority and whom has a tax treaty with the USA is eligible  for foreign tax  credit / deduction.     IRS instructions  form 1116  is my ref.   Please see pages 2. 3 and 6 for this  --->  2023 Instructions for Form 1116 (irs.gov)

2. Note that the  gain amount  that is taxed by both US and that other country ( India in your particular  case ) is the gross amount of foreign source income (  it is actually the lesser of  the gain per US laws and that  per the tax laws of the other country ).  For purposes of form 1116 the  taxes paid  is the actual amount paid/accrued/ levied by the other country.

3. Note that the form 1116  recognizes the total foreign taxes paid but limits  the amount allowable for the tax year  to the lesser of actual taxes  paid   and  "allocated"  US taxes  paid/levied on the foreign source income.  Thus   it is generally not 100% of the taxes paid to a foreign taxing authority.    That is why the questions about the  filing status and the quantum of the foreign taxes paid ---- the safe harbor amount being US$300 per filer.

Does this make sense ?     Is there more I can do for you ?  If you need more , please feel welcome to add to this thread OR you can PM me if you feel the situation will not be of interest to general public  ( again no Personally Identifiable Information please  ).

Namaste  Murali ji

pk

[muralinn · Accepted solution]

Hi pk-ji:

Below is what I got for a cross-border tax attorney.  Net: One CANNOT take credit for taxes paid in India on capital gain from sale of stocks. See below for details.

I am interested in your views as well.

According to Article 25 of the DTAA. the US shall allow its residents or citizens to claim a tax credit in the US on income tax paid to India. Therefore, accordingIy this Article 25, taxes paid In India on capital gain on shares and securities (in the form of TDS or otherwise) should be allowed to be claimed as tax credit in the US. However, there is more to this.

Article 25 Further slates that 'the determination of the source of income for purposes oF this Article shall be subject to such source rules in the domestic laws of the Contracting States as apply for Ihe purpose of limiting the foreign tax credit. And here is where the trouble begins. According to the US tax code, in order to claim a tax credit or taxes paid in another country, the income must be “foreign sourced." According to IRC Sec 865, income from sale of personal property by a US resident shall be sourced in the U.S. So if you are a US person (that is US citizen, resident or green card holder) and you sell securities in anoiner country they will be treated as US sourced. So foreign tax credit will not be available on such income. What this means Is that you will pay tax in India on your capital gains. You will also end up paying tax In the US on this income with no benefit of tax credit.

[muralinn]

Here is another source that says that the taxes paid for capital gain on sale of stocks in India will be taxed again in the US. Checkout Same Same, But Different: Taxing a Sale of Indian Stock by a U.S. Person — Ruchelman P.L.L.C. (ruche...

[muralinn]

i dont believe this is the best or the right answer. This is rather a complex issue and very few CPAs are knowledgeable to provide proper guidance.

[pk]

@muralinn  ji,  I would generally disagree with your conclusion ----

(a) Double taxation clause  in all its forms  in The Tax treaty  allows  mitigation  of double taxation effects by allowing for  foreign tax credit --- irrespective of the  type of income ( there are of course  lots of "ands" , "ifs" and "buts"

(b) Alienation of personal property ( i.e. non income producing )  showing gains may be taxed  ( and per the tax laws of each contracting country )  by each country -- sometimes there are limits on the tax rate  by one or both countries.

(c)  But you are  correct  in that per US tax code  a US person's  passive incomes are generally sourced  to the  resident state or US.  However, when the source is foreign  such as Foreign dividends  ( Foreign source )and taxed by a foreign Tax authority with whom US has a treaty, under the terms of the treaty these Foreign taxes are eligible for  Foreign Tax credit.

(d)  Additionally , if a US person resides in a foreign country and gets a passive income from home country  and the Tax home country then taxes this income ( i.e. double taxation by both US home country and the tax home country ) then one uses  "Re-sourced by Treaty" technique/ category to ameliorate  double taxation -- foreign tax credit/ deduction is used.

(e) Humbly disagree that this is a very complex situation and needs a CPA --- CPAs are mainly/predominantly accounting specialists  -- not necessarily tax expert ( even though many do and the IRS is full of  CPAs ) .   If you are uncomfortable   with my position, then please do consult an EA ( Enrolled Agent -- certified by IRS;   Tax Lawyer and a CPA well versed in International taxing.

I rest my case.

Namaste ji

pk

[muralinn]

as I mentioned, we can take credit on the Indian taxes paid on dividends but not on capital gain on stocks per 2 cross-border tax experts.

murali

[pk]

@muralinn ,  For US tax purposes and  for US persons there must be recognition of all  world income, irrespective of source  and type  ( unless explicitly  exempted ).   There is, however,  no requirement to recognize  taxes paid to another  / foreign taxing authority.  It is the choice of the taxpayer.

Whereas , I stand by my earlier position  and have no wish to argue with your "experts" , here are a few  google search results that may be of interest ( of course without considering the effects of Tax Treaty :(

1.    

Can I claim foreign tax credit on capital gains?

U.S. citizens and resident aliens, including green card holders, are eligible for the foreign tax credit. They can claim the FTC for foreign income taxes paid on both earned and unearned income, such as wages, dividends, interest, and capital gains.Oct 12, 2023

Foreign tax credit and Form 1116 explained

Thomson Reuters tax and accounting

https://tax.thomsonreuters.com › blog › foreign-tax-credit

2.   

Foreign Tax CreditThis credit is a dollar-for-dollar reduction in your US taxes, ensuring that you aren't taxed twice on your capital gains. However, it's important to note that this credit applies only to foreign taxes paid on the gain and not to taxes on any other income.

How to Avoid Capital Gains Tax on Foreign Property

Greenback Expat Tax Services

https://www.greenbacktaxservices.com › knowledge-center